The Non-Resident Indian (NRI) status is hugely important from a taxation perspective. Because taxation is an evolving body of rules and regulations the definition of NRI is also prone to changes. Find out whether you qualify as an NRI or not, here.
Note: For the sake of simplicity and clarity, this article treats any person residing outside India, whether an Indian citizen (example, having an Indian passport) or a foreign national of Indian origin (example, having a foreign passport), as an NRI. This may not be technically accurate, but the information is of the same value for both practically.
As an NRI, you can hold savings accounts in India. The Reserve Bank of India (RBI) schemes allow you to invest and trade in various financial instruments in India. It often makes sense to park some of the income in India as a Person of Indian Origin (PIO) or NRI. The Indian banking system demarcates different types of bank accounts with different criteria for NRIs. If you have heard of NRE and NRO accounts but are confused with the terms, here is a clearer idea.
What is an NRE Account?
This is an acronym for Non-Resident External account. Here, you can keep money earned in your resident country (obviously, outside India).
You may only deposit the money in foreign currency. The bank converts it into Indian currency at the exchange rate at the moment. Your money is not protected against currency fluctuation.
The benefit here is that the NRE account is tax-exempt in India. There is no restriction about the amount of repatriation. You may choose to withdraw the entire deposited amount and take it outside India. Or you may decide to invest for business or personal uses in India.
You have the option of starting a savings NRE account, current NRE account, recurring account, or fixed deposit NRE account.
What is an NRO Account?
The Non-Resident Ordinary account is the place to park the income from Indian sources. If you are a PIO or an NRI who has income in India from rentals, dividends, etc., an NRO account is where you keep your money.
You may open a joint account with an Indian resident. The terms and conditions here are stricter. Note that interest income earned in an NRO account undergoes a 30% tax deduction at the source. There are restrictions for repatriation (taking the money out of India from your NRO account) of funds, of $1 million USD in a financial year (April 1 to March 31). Consider an NRO account only if you have any earnings in India.
How to Choose Between NRE and NRO?
The Government of India proposes both the accounts to NRIs.
Key points worth knowing.
- Repatriation options: You can repatriate the complete amount, including principal and interest, from an NRE account. But, the upper limit in the NRO account is $1 million USD after the payment of taxes.
- Taxation rules: NRE accounts are tax-exempt in India. But NRO accounts fall under Indian income tax laws. Therefore, income tax, wealth tax, and gift tax, as well as the tax on interest, are all applicable. You may talk to your accountant about the DTAA (Double Taxation Avoidance Agreement).
- Deposits and Withdrawals: You may deposit money earned abroad in both the accounts. But income from Indian sources will go to only NRO accounts. You can withdraw money from both the accounts only in Indian currency. NRE allows repatriation in any currency.
- Joint holding: Both NRE and NRO accounts can have joint holders. For an NRE account, both holders must be NRIs. You may open an NRO account with a resident Indian citizen.
- Transfer of funds: You may transfer money from an NRE account to either another NRE or an NRO account. But you cannot transfer money from an NRO account to an NRE account.
- Exchange rate: The funds in NRE accounts face exchange losses due to daily fluctuations as well as conversion loss. Funds in an NRO account face no such loss, as they are typically deposited in Indian rupees as well as withdrawn in the same.
- Purpose of account: An NRE account helps bring foreign income into India and maintain the savings here. An NRO account maintains the income earned in India by an NRI.
Each of these above factors will guide you towards an informed decision. You must weigh out all the factors and decide which account you need to open: NRE, NRO, or both.
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