NRE accounts are a type of bank account available to Non-Resident Indians (NRIs) for parking income earned outside India. Funds in a non-resident external account are maintained in Indian rupees and can be freely repatriated abroad, subject to current regulations.
Deposits in these accounts are made in foreign currency and converted to Indian rupees, while withdrawals are in INR. These accounts can be in the form of savings, current, recurring, or . The purpose of holding a NRE account is to save, invest, and manage family expenses in India.
Difference between NRE and NRO accounts
NRE accounts differ from non-resident ordinary (NRO) accounts in terms of the source of funds and their intended use. While NRE accounts are meant for foreign income remitted to India, accounts are typically used to manage income earned within India, such as rent, dividends, interest, or pension.
Some other key differences include the tax treatment of these accounts and the rules governing interest income and repatriation of funds.
Are NRE deposit interest taxable in India?
Interest earned on NRE fixed deposits is fully exempt from income tax in India as long as the account holder qualifies as a non-resident under tax laws. What makes it even more attractive is that banks do not deduct TDS (tax deducted at source) on these deposits.
However, the income earned via such accounts can be taxable at the NRI’s country of residence depending on the rules and regulations set by the government of that particular country.
Another feature of NRE deposits is that both the principal and interest amounts are fully repatriable, allowing NRIs to transfer funds abroad without restrictions.
In the case of fixed deposits, NRE FDs do not offer the higher interest rates available to senior citizens on many domestic fixed deposits. As a result, NRI depositors above the age of 60 typically earn the same interest rate as other NRE fixed deposit holders.
Indian banks currently offer NRE fixed deposit rates ranging from around 6% to nearly 8% per annum, depending on the bank and tenure.
An NRI must have a NRE or NRO account in India as they cannot have a savings account in their name in India, according to Foreign Exchange Management Act (FEMA) guidelines. Hence, an must convert all their savings (money earned abroad) to a NRE or NRO account, depending on their requirement.
Tax treatment of NRO interest
NRI account interest is tax-free in India, but the same benefit doesn’t apply to NRO accounts. Interest earned on NRO savings accounts and fixed deposits is fully taxable in India, and banks are required to deduct tax at source while crediting any amount to your NRO account. The interest income is taxed according to the account holder’s applicable income tax slab rate.
If you are residing and working abroad but continue using the savings account in the home country, it can attract hefty penalties. The same rule applies even if occasional transactions were made by family members who are residing in India as the money in the account still belongs to the account holder.
Hence after moving abroad, an individual must convert their domestic savings bank account to a NRO account. If you fail to convert your savings account to an NRO account after becoming an NRI, the money in it does not disappear. However, there can be tax and compliance issues because banks apply different rules to residents and NRIs.