With the advent of globalization from the early 90s we have seen a lot of migration across the globe with even Indians choosing to reside permanently in other countries. People often migrate with the intention of increasing their income, having a good quality of life, better career opportunities etc. For NRI’s having an NRE account has become almost mandatory to transact in India.
When people move to a different country, they become non-residents of the country of their birth. Officially, there are a certain criteria that one needs to fulfill under the income tax act to be known as a Non-Resident of India or an NRI.
Once you become an NRI there is a separate set of rules that you need to comply with. An NRI is not allowed to have a savings account in Indian banks like regular citizens of India. There are 3 popular type of bank account an NRI is allowed to maintain i.e. Non-resident ordinary account (NRO), Non-resident external account (NRO) and foreign currency non-resident (B) account.
1. What is an NRE account?
Let us start with what is an NRE account? An NRE account is a bank account opened in India in the name of a Non-Resident to park their foreign earnings.
An NRO account on the other hand is an account opened to manage the income earned by an NRI in India. This income includes rent, interest, dividend, pension etc.
A Foreign Currency Non-Resident (FCNR) bank (B) account, also sometimes known as FCNR (B) is a term deposit account that allows you to transfer your foreign income to India in the same currency as your residence country. This helps you to effectively hedge against exchange rate risks. According to RBI guidelines an NRI or a Person of Indian Origin (POI) can open an FCNR (B) account.
2. What is the difference between an NRE and NRO account
Let us come to what is the difference between an NRE and NRO account. The major difference is with respect to repatriation of the money held in each of these accounts. While you can freely the principle as well as the interest accumulated thereon from an NRE account, the same is not the case with an NRO account. In case of an NRO account, the entire interest is allowed to be transferred to a foreign account, however only upto USD 1 million can be transferred from the principle amount.
Another difference between an NRE and NRO account is that NRE accounts are exempt from tax. This includes the interest as well as the principle. Further income originating from outside India can be deposited into either of these accounts, however income originating in India can be deposited in NRO account only. NRE account is prone to exchange rate risk however that is not the case with NRO accounts.
An NRI can even have a FD from their NRE or NRO account. However it is not wise to start an FD from the NRO account as the interest is taxable and there is no repatriation option on the interest earned or it is a tedious process. Also NRO FDs can be made only with funds, the source of which has originated in India or funds that have come from the NRE account. NRE FDs can be opened with funds received abroad as well.
3. How do you open an NRE account?
Opening an NRE account is pretty simple. If the NRI is on a trip to India, they can visit the branch of any of the top banks to open the account. Usually banks require simple documentation to open a bank account. Having a PAN card is usually mandatory. In addition they may ask you to produce proof of residence both in India and abroad. A few banks have recently started offering the service to open NRE or NRO bank accounts online.
4. How do you transfer money from NRO to NRE account
Another question that is on the mind of most NRIs is how they can transfer money from NRO to NRE or vice versa. As per RBI guidelines, NRIs are allowed to transfer funds to the NRE account upto a limit of USD 1 million per financial year from self NRO account. To do the same there are a set of documents required as listed below:
1. Cheque / Letter for funds transfer from the NRO to NRE account duly signed by the customer.
2. FEMA declaration
3. Documentary evidence of source of funds
4. Form 15CB (From Chartered Accountant)
5. Form 15CA (needs to be verified and submitted online on the income tax website)
An NRI can freely transfer funds from an NRE account to the NRO account.
5. Which is better NRE or NRO?
Often NRIs wonder which is better, NRE or NRO. It is crucial to understand the nature of both the accounts which are both complementary in nature rather than unrelated. They usually go hand in hand and it is advisable for an NRI to have both an NRE and an NRO account for ease of operations with respect to their banking transactions.
6. Which is the best bank for opening a NRE account?
NRIs also often wonder which is the best bank for opening a NRE account. The answer to this would be that any of the largest private or public sector banks should be able to help you out with maintaining a NRE or NRO account.
7. How do you transfer money from savings account to a NRE account?
It is not possible to transfer funds from a savings account to an NRE account as the source of the funds is local rather than external.
It is however possible to transfer funds from one NRE account to the other.
8. What happens to the NRE account on return to India by the NRI?
If the NRI decides to migrate back to India, they must immediately inform their bank to designate their accounts as domestic resident account or transfer the balance in their NRE/FCNR accounts to Resident Foreign Currency account. FCNR accounts can be continued till the date of maturity and upon maturity can be converted to RFC accounts.
9. How long can a person continue to maintain their NRE account after returning to India?
As soon as there is a change in the residency status of the person from NRI to resident, the NRI has the responsibility to inform their bank of such change so that the bank may take the necessary steps on the accounts held by the NRI.