Under FEMA, all Indian citizens who are non-resident and all Persons of Indian Origin (PIO) are classified as Non-Resident Indians (NRI). NRIs can hold three types of bank accounts in India: Non-Resident Ordinary (NRO) Account, Non-Resident External (NRE) Account and Foreign Currency Non-Resident (FCNR) Account
Here, we’ll focus on NRO and NRE accounts.
Non-Resident Ordinary (NRO) Account
When an Indian citizen becomes a non-resident under FEMA, they must have all their existing bank accounts designated as NRO accounts. Alternatively, an NRO account can be opened anytime after acquiring NRI status.
Foreign citizens who are not PIOs can also open NRO accounts while staying in India. However, citizens of Pakistan and Bangladesh require prior RBI permission.
NRO accounts can be held singly or jointly, either with a resident or a non-resident. They can be savings, current, recurring, or fixed deposit accounts and are denominated in Indian rupees. These accounts can be operated either by the account holder or a resident holding power of attorney.
Key features of NRO Account
You can remit money from abroad to your NRO account through banking channels. You are also allowed to deposit up to $5,000 in foreign currency, provided it is duly supported by a currency declaration form, while in India.
All your Indian income, such as rent, dividends, pensions, and sale proceeds from Indian assets, can also be credited to this account. You can also credit gifts and loans received in Indian currency from your relatives into your NRO account.
You are allowed to transfer up to USD 10 lakh abroad during a financial year from your NRO account, after payment of local income taxes, if any.
The balance in the account can be used to pay rent and taxes, and to make investments on a non-repatriation basis in India. Once you become a resident under FEMA, you must inform the bank immediately upon your return to India.
Non-Resident External (NRE) Account
NRE accounts can only be opened after becoming an NRI under FEMA. These accounts must be opened personally by the NRI; power-of-attorney holders cannot open them. An individual can hold multiple NRE accounts.
NRE accounts can be savings, current, recurring, or fixed deposits, denominated in Indian rupees, and held singly or jointly (only with other NRIs). Citizens of Pakistan or Bangladesh cannot open NRE accounts.
Key features of NRE Accounts
NRE accounts are treated as accounts maintained outside India; balances can be freely transferred to other NRE accounts or remitted abroad without limit or RBI permission.
Only limited credits are allowed, including funds remitted from abroad in permitted currencies, foreign currency cheques/drafts/traveller cheques issued outside India, proceeds from repatriable investments, and declared foreign currency brought to India.
Balances can be used for investments (repatriable or non-repatriable) and EMI payments for home loans. Loans can also be availed against NRE balances in India or abroad.
Funds can be freely transferred to an NRO account. However, transferring money from an NRO account back to an NRE account requires following the prescribed procedure. Once funds are transferred from NRE to NRO, they lose the free transferability feature, which is exclusive to NRE accounts. Careful consideration is advised before making this transfer.
Taxation of interest in India
Interest earned on all the NRO accounts is fully taxable in India, and the banks are required to deduct tax at source while crediting any amount to your NRO account, including interest on a savings bank account, for which there is no requirement to deduct tax at source, without any basic threshold.
The interest earned on your NRE account is fully tax-free in your hands as long as you are a Non-Resident under FEMA. The interest on the NRE account will become fully taxable from the date of your arrival in India for good unless you have obtained permission from the RBI to continue the account.
Balwant Jain is a tax and investment expert. Views expressed are personal.
