Background:
When a person becomes a Non-resident one of the preliminary compliances to be undertaken includes re-designating the bank accounts held in India. Unlike Residents, Non-Resident Indians [NRI] cannot hold standard savings accounts with Indian banks.
Before we dwell on the subject let us understand the concept of ‘Non Resident Indian or NRI’ as per Foreign Exchange Management Act, 1999 [FEMA]
NRI as per FEMA
NRI is defined under FEMA as a person resident outside India who is either a citizen of India or is a Person of Indian Origin (PIO)
PIO means a citizen of any country other than Bangladesh or Pakistan,
1. who at any time held Indian Passport, or
2. who or either of whose parents or any of the grand parents was a citizen of India under Constitution of India or under Indian Citizenship Act, 1955, or
3. who is spouse of an Indian citizen or spouse of person referred to in 1 and 2 above
A detailed analysis of the types of bank accounts, its features, the taxation structure and the suitability of a particular account for a specific purpose is discussed below for easy understanding of this topic.
As per the provisions of FEMA upon becoming an NRI , a person can hold the following three types of accounts in India viz.
1. Non-Resident External (NRE) Account
2. Non- Resident Ordinary (NRO) Account
3. Foreign Currency (Non-resident) Account (Banks) Scheme – FCNR (B) Account
Non-Resident External (NRE) Account
- The purpose of an NRE account is to park foreign earnings by an NRI into an account in
- It is pertinent to note that money can be deposited only in terms of foreign currency in this account which would be reflected (converted in) in INR terms.
- Only NRIs and PIOs can open NRE account i.e. Foreign companies or foreign nationals will not be permitted to hold NRE accounts in India.
- Individuals/ entities of Pakistan and Bangladesh shall require prior approval of Reserve Bank of India [RBI] to open an NRE Account
- Since none of the funds deposited in this account are from incomes accrued in India, no income tax is payable on any income received in this account including interest income earned from the deposits in NRE Account.
- Money from NRE account is freely and fully repatriable.
- It shall be opened in any form like savings, current, recurring, fixed deposits account.
- Gift/Transfer from one NRE account holder to another NRE account holder is permitted.
- In cases where the NRI becomes a resident it is mandatory to change the status of the NRE account to a resident account or funds from the NRE account should be transferred to foreign currency accounts.
Non- Resident Ordinary (NRO) Account
- Incomes earned in India after becoming a non-resident are parked in the NRO Account.
- Any person resident outside India including NRIs and PIOs can open an NRO Account. Individuals of Pakistan and Bangladesh require prior approval of RBI to open such accounts.
- Funds in this account can be deposited in foreign currency or in Rupee terms however the balance of the account would be reflected in (converted to) INR.
- When a Resident becomes an NRI his savings accounts itself can be converted into an NRO Account.
- It shall be opened in any form like savings, current, recurring, fixed deposits account.
- Funds from the NRO Accounts can be repatriated post payment of applicable taxes.
- Prior to 2012, the transfer of funds from NRO to NRE account was not permitted by RBI. However, post 2012, RBI has permitted transfer of funds from NRO to NRE account upto a limit of USD 1 million in a financial year. (For transfer of funds from NRO to NRE account, NRIs need to submit Form 15CA and form 15CB to their bank.)
- The interest earned in NRO account is subject to tax as well as TDS provisions. Hence in order to deposit savings earned abroad, NRE Account would be considered as a more favorable choice.
Foreign Currency (Non-resident) Account (Banks) Scheme – FCNR (B) Account
- An NRI can opt for FCNR account in order to maintain the savings from their country of residence, in India, in the designated foreign currency of that country.
- NRIs and PIOs are eligible to open and maintain these accounts with an authorised dealer.
- These accounts can be maintained in any permitted foreign currency other than Indian rupees.
- These accounts may be opened only in the form of term deposit with maturity of such period as may be specified by the Reserve Bank from time to time.
- The period of term deposits can be from one year to five years. One may close an FCNR (B) account prematurely. However, in order to earn any interest on the amount, the deposit must stay with the bank for at least one year.
- In case of change of the account holders status from Non-Resident to Resident, the FCNR (B) account shall continue till maturity. Post that, such account shall be converted into resident deposit account or RFC account at the option of the depositor.
- One of the advantages of holding a FCNR (B) account is that these accounts can be maintained in any foreign currency. This reduces the risk of currency fluctuation as in the case of NRO and NRE accounts.
- Funds can be freely transferred to any NRE account from an FCNR (B) account.
Summary:
A summarised table for a quick comparison is presented below :
| Sr. No. | Particulars | NRE Account | FCNR (B) Account | NRO Account |
| 1 | Purpose | To park foreign earnings in India, in Indian denomination. | To save money earned overseas, in term deposits, in foreign currency. | To park earnings from India in Indian denomination |
| 2 | Taxation | Deposits are Tax-Free,
i.e., the principal amount, and the interest earned thereon, is exempt from tax. |
The interest earned in NRO accounts is subject to tax as well as TDS provisions | |
| 3 | Repatriability | Money is freely repatriable i.e. both the Principal amount and interest earned are freely and completely transferable. | Funds from the NRO Accounts can be repatriated post payment of applicable taxes with a limit of USD 1 million in a financial year | |
| 4 | Exchange rate risks | Involves exchange rate fluctuation risk | Not prone to risk | Involves exchange rate fluctuation risk |
| 5 | Period of Deposit | As per deposit-taking Bank | For a minimum period of 1 year and maximum period of 5 years | As per deposit-taking Bank |
| 6 | Suitability & Benefits
|
An NRI should opt for NRE Account if they want to hold or maintain their overseas earnings in Indian currency.
NRE Accounts are suitable to keep their savings liquid. |
An NRI can opt for FCNR account to maintain their savings from their country of residence, in India, in the designated currency of that country. | An NRI can opt for NRO Account if they have Indian income from various sources like rent, dividend, gains from sale of Property etc.
This helps them save their earnings from India in Indian currency itself. |
Another type of account that can be opened by a person resident outside India includes a Special Non-Resident Rupee (SNRR) Account. The same shall be discussed in detail in the upcoming post.
Author Bio
Very well written. Easy to comprehend. Please do write more. Topics directly dealing with your line of specialisation will be your area of operations.
Best wishes
Subramanian Natarajan CPA