All Indian citizens, who are non-resident under FEMA and non-Indian citizens of Indian Origin are called as Non-Resident Indians (NRI) under FEMA. All the NRIs can have three types of bank accounts in India, namely Non-Resident Ordinary (NRO), Non-Resident External (NRE) account and Foreign Currency Non-Resident (FCNR) Account in India. Let us discuss the features of NRO and NRE accounts.
Non-Resident Ordinary (NRO) Account
An Indian Citizen has to get all his existing bank accounts designated as NRO account as soon as he becomes a non-resident under FEMA. He can also open an NRO account any time after becoming an NRI. A foreign citizen and who is not a Person of Indian Origin (PIO) can also open an NRO account during his stay in India. However, the citizens of Pakistan or Bangladesh need prior permission of RBI to open an NRO account. You can have the NRO account as a single account or a joint account with either a resident or a non resident. NRO accounts can be saving, current, recurring or a fixed deposit account and are denominated in Indian rupees. These accounts can be operated by the accountholder or a resident ‘power of attorney holder.’
You can remit money from abroad to your NRO account through banking chancels. You are also allowed to deposit foreign currency upto $5000, duly supported by currency declaration form, while you are in India. Moreover, all your Indian incomes like rent, dividends, pension, sale proceeds of Indian asset, etc., can also be credited in it. You can also credit gift and loans taken in Indian currency, from your relatives in the NRO account.
In addition to deposits in the account, you can transfer an amount upto $10 lakhs abroad every year from your NRO account after payment of local income taxes if any. The balance in the account can be used payment of rent and taxes. NRO account can also be used for making investments in India on non repatriation basis. You need to inform the bank immediately on your return to India once you become a resident for FEMA purposes and the bank will re designate your NRO accounts as normal accounts.
Non Resident External (NRE) Account
You can open an NRE account only after you have become a non-resident under FEMA. NRE accounts can only be opened by the NRI personally. You can maintain more than one NRE accounts in India. NRE accounts are also denominated in Indian currency. An NRE account can also be opened singly and jointly, but only with other Non-Resident. A Pakistani or Bangladeshi citizen can’t open an NRE account. Like an NRO account, NRE account can also be had in various forms like saving, current, recurring and fixed deposits.
NRE account though maintained with banks in India is like a bank account maintained outside India for all practical purposes and amount from it can be freely transferred to any another NRE account or remitted outside India without any limit or permission. Since the balance in NRE account can freely be remitted outside India, RBI permits only limited credits in the NRE account. Any amount remitted from outside India, in any permitted currency, can be freely credited in your NRE account. Likewise proceeds of cheque drawn on your foreign currency account as well as that of draft or traveller cheques issued outside India can also be credited to the NRE account. Sale proceeds of investments made in India, on repatriation basis, can also be credited to the NRE account. Likewise any foreign currency, which is declared in foreign currency declaration form on visit to India can also be deposited in your NRE account.
You can also use balance in your NRE account to make investments whether on repatriation basis or otherwise or for payment of EMI of your home loans. You are also allowed to get a loan against balance in these accounts in India as well as outside India. The balance in NRE account can be freely transferred to your NRO account, but for reverse i.e. for transferring money from your NRO account to NRE account again, you need to follow the prescribed procedure. Once the amount is transferred from your NRE account to NRO account, it loses it free transferability character, which is attached with money in NRE account. So, think twice before you transfer your money from NRE account to NRO account.
Taxation of interest in India
Interest earned on all the NRO accounts is fully taxable in India and the banks will deduct tax at source, while crediting any amount to your NRO account including interest on saving bank account for which there is no requirement to deduct tax at source for residents.
The interest earned on your NRE account is fully tax free in your hand as long as you are a Non-Resident under FEMA. So, the interest will become fully taxable from the date of your arrival in India for good unless you have obtained permission from RBI to continue the accounts.
We will discuss one more type of bank accounts i.e. FCNR in another article.
The writer is a tax and investment expert and can be reached at email@example.com and on his twitter handle @jainbalwant