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Are you confused about choosing the right bank account to use as an NRI…? You will get the answer in this article.
An Indian living abroad doing a service, running a business, or pursuing any vocation is a Non-Resident Indian. It is estimated there are over 25 million NRIs spread across the globe.
With this huge Diaspora, banking needs for the transfer of funds, savings, investments, and repatriation of NRIs have also expanded.
Banking Laws allow an NRI to maintain bank accounts in India, invest in securities/shares and deposits, with Indian firms/companies, and invest in immovable properties in India. In this article, we’ll discuss NRI banking/savings accounts.
Types of NRI Bank (savings) Accounts
An NRI can open, hold and maintain, different types of bank accounts with a bank authorized to deal in foreign exchange. The four types of NRI bank accounts most widely used and offered by the leading banks in India are:
1. Non-Resident External (NRE) Account
2. Non-Residency Ordinary (NRO) Account
3. Foreign Currency Non-Resident (FCNR) Account
4. Resident Foreign Currency (RFC) Account
Now let’s look into the special features and benefits of every account in detail
1. Non-Resident External (NRE) Savings/Fixed Deposit Account
The NRE account is mainly used to make deposits from abroad.
An NRE bank account can be opened and maintained as a current, savings, recurring, or fixed deposit account.
This account is maintained in Indian Rupees. Deposits of all foreign exchange are first converted to Indian rupees at the buying rate by the banks.
Withdrawal in foreign currency is allowed given the Indian Rupees in the account are converted to the same at the selling. The account holder has to bear the conversion loss.
Money from this account is freely repatriable, that is, funds held in this account can be freely sent to India as well as another country. Moreover, the fund is transferable from an NRE account to an NRO account without any restriction.
Similarly, the NRE account can receive money remitted from abroad, or transferred from another NRE account in India.
Funds held in this account and interest earned are fully exempt from wealth tax and income tax, as well as gifts to close relatives in India are free of gift-tax.
An NRE account be opened and held jointly by more than one NRI. A resident holding a power of attorney (PoA) is not authorized to open an NRE account on behalf of an NRI, but he/she can make local payments in Rupees on behalf of the NRI account holder.
Loans/overdrafts are available to an NRE account holder against the security of a fixed deposit in his/her account.
The NRE account can be converted into a regular resident account whenever the NRI account holder returns to India and becomes a resident.
Nomination is allowed for NRE accounts.
2. Non-Residency Ordinary (NRO) Savings/Fixed Deposit Account
The NRO account is mainly used to make a deposit from Indian or abroad.
An NRO account can be opened and maintained in the form of a current, savings, recurring, or fixed deposit account.
An existing bank account held by an Indian National is also designated as an NRO account upon the holder being declared NRI.
The NRO account is maintained in Indian Rupees.
Funds held in the NRO account are repatriable but only on certain conditions as follows. The maximum limit of funds transferable from an NRO to an NRE account is USD 1 million in a financial year. The transfer of funds from the NRO to the NRE account is subject to taxability as per your tax slab.
You need to follow procedures which are clearly explained in the article here, to transfer the funds from NRO to the NRE account.
Interest earned on the funds in this account is taxable.
An NRO account can be held jointly with a resident and /or with a non-resident Indian. However, a resident PoA holder is not authorized to open an NRO account on behalf of an NRI. But he/she can make local payments on behalf of the same.
Loans to non-resident account holders and third parties may be granted in Rupees by Authorized Dealers / bank against the security of fixed deposits subject to certain terms and conditions.
The NRO account can be converted into a regular resident account as and when the NRI account holder returns to India and becomes its citizen.
A nomination facility is available in this account.
The NRO account has a repatriable limit of $1 million every financial year.
Below transactions are permissible from an NRO account:
- Over and above the USD 1 million limit, the below transactions are permissible by RBI:
- Interest Income earned for savings balances and deposits.
- Dividend income earned.
- All current business income earned in India.
NRIs can manage these accounts by either appointing a mandate holder to look after their NRE or NRO accounts in India, or executing a Power of attorney to carry out their investments.
In case of capital market, NRIs can manage themselves through online broking platforms NRIs can invest in futures & options segment of the exchange out of Rupee funds held in India on a non-repatriation basis.
However, they are not permitted to carry out Intra-day transactions in the cash segment. Short Selling is not permitted. Also, they cannot participate in currency derivatives trading.
3. Foreign Currency Non-Resident (FCNR) Fixed deposit Account
An FCNR account can be opened only in the form of term deposits with a maturity ranging from 1 to 3 years.
The account is maintained in any free convertible currency mainly U.S. Dollar, Pound Sterling, Japanese Yen, and Deutsche Mark.
Indian currency cannot be deposited in this account.
Balances, principal, and interest earned, held in this account can be transferred outside India in the same currency in which the account is maintained or in any other convertible currency.
The account holder may, of his own accord, receive repayment in Indian Rupees at buying Rate on the date of repayment.
The entire deposit, principal plus interest, is exempt from tax.
This account can be opened jointly with a resident close relative on a former or survivor basis. The resident close relative as a PoA holder can operate the account in accordance with extant instructions during the life time of the NRI account holder.
Loans may be granted either to the depositor or the third party against the security of funds held in the FCNR account.
When the NRI account holder returns to India and becomes its citizen, deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by the holder.
A nomination facility is available in this account as well.
4. Resident Foreign Currency (RFC) Account
RFC account is mainly useful for returning NRIs to deposit their foreign currency in India. The RFC account can be maintained only in a Foreign Currency.
This account can be held as a savings account as well as a term deposit account. The funds in the RFC account can be withdrawn when necessary but interest will be paid only if the amount is held for more than one year.
Indian rupee cannot be deposited in the RFC account.
The interest earned from the funds is taxable in India. But if you are a returning NRI and have the RNOR status, you can get exempt from tax for the 2 year period with RNOR status.
You can transfer funds from your NRE or FCNR account if you decide to become a Resident.
The deposited funds can be transferred to NRE or FCNR account if you decide to become an NRI again.
The interest earned by the funds in the RFC account is fully repatriable.
You cannot avail of any loan against the deposits in the RFC account.
NRI investments in Indian equity markets
Besides shares or debenture of an Indian Company through the stock exchanges, NRIs can also invest in other securities like Mutual Funds, ETFs, Government Securities, treasury bills, Bonds, Portfolio management services etc.
They can do so via NRE (Non-Resident External) account, or NRO (Non-Resident Ordinary) accounts. Their investments can either be on repatriation or non-repatriation basis, with investments made through the NRE account being repatriable, while those through the NRO account has a repatriable limit of $1 million every financial year.
Enablers that would make NRI investments
It has already been well established and recognised that the Indian diaspora are very successful and also enjoy a strong emotional connect with their country of origin. Thanks to a digital and connected world, NRIs today are more strongly connected to India than they were in the past.
They are a strong contributor to forex inflows in the form of remittance, investments and philanthropy.
NRIs are keen to contribute to India in multitude of ways. As India cements its position as a preferred global investment destination, and added to the fact that the Indian markets are expected to perform strongly over the next several years, the inflows from the NRI community can also grow manifold from current levels.
This inflow is more stable and predictable and sticky against some of the institutional inflows which by definition is opportunistic in nature.
Final Thoughts:
Understanding these fine differences between NRE, NRO, and FCNR accounts helps an NRI to choose the right kind of bank account suitable for him.
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