All Indian citizens who are non-resident under FEMA and all Person of Indian Origin (PIO) are called Non Resident Indians (NRI) under FEMA. All the 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 take a look at 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 NRI. A foreign citizen who is not a 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 channels. 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 this account. You can also credit gift and loans taken in Indian currency, from your relatives in the NRO account.
You are allowed to transfer upto 10 lakh USD 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 for payment of rent, taxes and for making investments on non repatriation basis in India. Once you become a resident under FEMA, you need to inform the bank immediately on your return to India.
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 so a power of attorney holder cannot open NRE account for an . One can maintain more than one NRE accounts in India. NRE account 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 cannot open an NRE account. Like 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 and amount from it can be freely transferred to 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 also credited to the NRE account. Sale proceeds of investments made only 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 the 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 loan. 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 only 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 are required to 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, without any basic threshold.
The interest earned on your NRE account is fully tax free in your hand as long as you are a Non Resident under FEMA. The interest on NRE account 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.
Balwant Jain is a tax and investment expert. Views expressed are personal.