Everything you need to know about NRE and NRO Accounts
Making a move overseas not only involves wrapping up things in the home country, but also getting things in order in the new country of residence. For many, it could mean starting life from scratch. This might entail getting a new home, starting a new job, buying a car and even something as basic as opening a new bank account. Indians moving abroad for opportunities who wish to maintain bank accounts in India need to open accounts designated for Non Resident Indians (NRIs).
Are you an NRI?
First, it is important to understand one’s residential status after moving abroad. The Income Tax Act, 1961 (ITA) and Foreign Exchange Management Act, 1999 (FEMA) have varying definitions for a Non Resident Indian.
According to the ITA, an Indian citizen who moves abroad for the purpose of employment may be termed as a non-resident of India if he/she is not physically present in the country for over 181 days in a financial year (April to March). However, if the number is 60 days or more, ensure your time spent in India is less than 365 days, across the previous four years.
On the other hand, according to the FEMA, a person who has left India for the purpose of employment outside the country is considered as an NRI from the date on which he/she left India. So, while a person may be termed an NRI under FEMA, he may still be considered as a resident of India under the ITA. In this case, it is best to reveal the intention of the length of the stay outside India to the bank authorities and then open the desired bank accounts.
Once your status is established, it is time to consider your two main options: NRE and NRO accounts. You can select the account according to your need, which can range from sending money to the home country for maintenance of family members, making investments, or even safeguarding the income earned from assets in India. Let’s look at each of them to understand what they have to offer, their advantages and their suitability.
Non Resident External (NRE) Account
Those who wish to send their overseas earnings to India are required to open a Non-Resident External Rupee Account (NRE), an Indian rupee-denominated account in India. This account is available in savings, fixed and recurring deposits. The NRE account gives account holders high liquidity and the advantage of benefitting from investments in India.
As both the principal amount and the interest earned on NRE accounts are exempt from tax in India, this account also proves to be a great way to invest earnings in instruments such as fixed deposits and stocks, and earn returns.
It is also extremely useful when NRIs need to meet financial obligations back home such as household expenses, payment of children’s school fees and investing for retirement.
Further, the principal and interest earned can be freely repatriated from India to the country of residence of the account holder.
NRE accounts can be opened as a joint account with other Non-Resident Indian(s) and Resident Indians.
Non Resident Ordinary (NRO) Account
Like NRE accounts, Non-Resident Ordinary Rupee Accounts (NRO) are also rupee-denominated accounts. These accounts are designed for those who wish to deposit the earnings in India arising from rent, dividends, salaries etc.
Unlike NRE accounts, interest earned on this account is taxed at the rate of 30% (plus surcharge) and other applicable taxes in India according to the ITA. In order to take the benefit of lower rates of tax as per double taxation avoidance agreement (DTAA) entered in by India, NRIs need to submit the Tax Residency Certificate issued by Tax Authorities of the country of his residence.
Apart from different tax treatment, the amount of money that can be repatriated also varies. In case of NRO account, remittance outside India of current income such as rent, dividend, pension, interest, etc. and remittance up to USD one million, per financial year (April- March), are allowed for all bona fide purposes, subject to the satisfaction of the Authorised Dealer (AD) bank. This amount can be repatriated after the applicable taxes are deducted.
NRO accounts can be opened as a joint account with other Non-Resident Indian(s) and Resident Indians. However only resident close relative can be added as joint account holder in NRO accounts on "Former or Survivor" basis only.
The average investment term and monthly balance to be maintained in NRE and NRO accounts varies from one bank to another. Both accounts have the nomination facility where a nominee can be appointed to be entitled to the proceeds of the account in the event of the death of the account holder.
Foreign Currency Non Resident (FCNR) Deposit
Those who wish to shield themselves from currency risk have the option to open Foreign Currency Non-Resident (FCNR) deposit. This is purely a term deposit which holds funds in foreign currency such as US Dollar, UK Pound, Canadian Dollar, Euro and Japanese Yen, among others.
Like NRE accounts, interest earned on this deposit is exempt from tax in India and funds are freely repatriable outside India.
Summing it up
If you mainly have income from your employment and investments abroad, it is best to open an NRE account to freely move your funds between India and your country of residence. However, if a significant chunk of your earnings are from investments and assets in India, being an NRI, you will only be able to deposit those earnings in NRO accounts. If a person holds both these accounts, the amount can also be transferred within these accounts subject to required documentation. Lastly, if you know you will not need your funds anytime soon, it’s best to lock it away in an FCNR term deposit and let you money work for you.
It is best to assess what category of NRI you fall under and then make your banking decisions. You can learn more about these products and the Global Indian Banking programme from YES BANK by clicking here.