In this article, you will learn:
The Non-Resident Indians find it difficult to park their foreign earnings as well as manage income earned by them in India. This is because RBI puts restrictions on Non-Resident Indians to remit their overseas earnings to India and deposit their savings or earnings from Indian sources.
Opening NRE and NRO accounts helps NRI’s to undertake such activities hassle free. The Reserve Bank of India via Foreign Exchange Management Act, 1999 lays down provisions with regards to opening and maintaining NRE and NRO Accounts.
Thus, if you are an NRI who is leaving India for work or undertaking business outside India, it is your responsibility to intimate your bank about your NRI status. This is because on intimating this to your bank, your bank converts your existing savings or current account to NRO Account on fulfilling the requisite formalities.
If you fail to inform your bank about your NRI Status, you will be liable for hefty penalty. In this article you will learn, what are NRE and NRO Accounts, why are they important and difference between NRE and NRO Accounts.
What is NRE Account?
Non Resident (External) Rupee Account is the account that enable Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) to easily deposit their foreign earnings into this account from the country of their residence.These accounts are denominated in Indian Rupees – that is they are converted into INR at the current exchange rates.
NRIs and PIOs are allowed to open and maintain NRE Accounts with Dealers and Banks including Co-operative Banks who are authorized by the Reserve Bank of India (RBI) to maintain such accounts.
Furthermore, NRE Accounts are maintained in the form of Savings Account, Current Account, Recurring or Fixed Deposit Accounts. These accounts are opened in the name of the NRI and can be opened only by the account holder himself and not by the holder of Power of Attorney (POA) in India.
Benefits of NRE Account
Thus, if you are an NRI or a PIO, you can:
Park Your Foreign Earnings
An NRI can easily park your foreign earnings into an NRE account.
An NRI can freely repatriate principal plus interest, that is, convert the deposited earnings and interest earned on them into the original foreign currency.
Make Payments in India
An NRI can utilize the amount deposited to make payments in India as well as outside India.
NRIs can make investments in India from amount deposited in NRE account
Use NRE Funds As Security
NRIs can utilize NRE account funds as security for availing rupee loans in India for oneself and third parties as well as foreign currency loans outside India both for oneself and third parties.
Authorize ROI as POA
NRIs can authorize a resident of India as the power of attorney holder of your NRE account.
Accordingly, such a resident may be allowed to operate the NRE account on your behalf for undertaking activities such as withdrawing money for local payments and making remittances to you.
In case you are a bank authorized by you are eligible for making investments in India, such power of attorney holder of your account would be allowed to operate your account in order to make such an investment.
Earn Tax Free Interest
NRIs can earn tax free interest on funds deposited in NRE accounts. In other words, income earned in NRE accounts is exempt from income tax in India.
Hold Joint Accounts
Furthermore, NRI’s/PIO’s are allowed to hold joint accounts in the name of two or more NRI’s or PIO’s. However, such accounts can be held by the NRI’s/PIO’s with relative/s on former or survivor basis.
In addition to this, such a relative would be allowed to operate the NRE account of the NRI as a Power of Attorney holder during the lifetime of the NRI subject to prescribed instructions.
Change of NRE to RFC Account on the Change of Residential Status
It must be noted that if your residential status changes, then such NRE accounts would be shifted to the resident accounts or the funds in the NRE accounts would be transferred to Resident Foreign Currency (RFC) account at your option.
This would be done the moment you return to India for the purpose of employment, undertaking business, vocation or for any other purpose that suggests that you intend to stay in India for an indefinite period.
However, if you happen to visit India only for a short period of time, such an account would continued to be treated as NRE account.
What is NRO Account?
Non-Resident Ordinary Rupee (NRO) Accounts are the accounts that allow the NRI to manage income earned in India. In other words, such an account can be opened with an authorized dealer or an authorized bank for putting through bona-fide transactions denominated in INR.
Such accounts are maintained in the form of savings, current, recurring or fixed deposit accounts. Furthermore, the NRO accounts are denominated in Indian Rupees.
Benefits of NRO Account
Thus, if you are an NRI, then you can use NRO accounts for :
Deposit Proceeds From Outside India
NRIs/PIOs can deposit proceeds received from remittances in a permitted currency from outside India via banking channels
Receive Outstanding Payments
NRIs/PIOs can receive any authorized outstanding payments in India.
Make Local Payments
NRIs/PIOs can make local payments in Rupees including payment for investments.
Make Remittances Outside India
NRIs/PIOs can utilize funds available in NRO accounts for making remittances outside India out of the income earned in India after paying eligible taxes in India
Receive Transfers From NRO Accounts
NRIs/PIOs can receive transfers from other NRO accounts.
Make Transfers to Other NRO Accounts
NRIs/PIOs can make transfers to other NRO accounts.
Settle Charges on International Credit Cards
NRIs/PIOs can utilize funds in NRO accounts to settle charges on International Credit Cards issued by your authorized bank or dealer in India. This is subject to the limit for repatriation of balances that are held in NRO accounts.
NRIs/PIOs can avail loans for oneself as well as for other parties. In other words, funds lying in your NRO accounts can be utilized as a security to avail rupee loans or overdraft for oneself or rupee loans and overdrafts to third parties.
Make Remittances up to Rs 1 million US dollars
It must be noted that remittances up to Rs 1 million US dollars can be made from the NRO account in a given year. This is allowed provided you give an undertaking along with Certificate issued by Chartered Accountant.
Appoint Resident as POA
NRIs/PIOs can also appoint the resident as the Power of Attorney holder of your NRO account. Such a resident would thus be allowed to operate your NRO account.
Such operations would however be limited to making local payments in INR including payments for eligible investments as well as making remittances outside India of current income in India which is net of applicable taxes.
Further, such a resident POA holder can only repatriate funds outside India to you and not to any other person under any circumstance. He is also not allowed to make any payment in terms of a gift to a resident on your behalf as well as transfer funds to other NRO account.
Difference Between NRE and NRO Account
|S.No.||Particulars||NRE Account||NRO Account|
|1.||Full Form||Non Resident (External) Rupee Account||Non – Resident Ordinary Rupee Account|
|2.||Purpose||Enables NRIs and PIOs to easily park their foreign earnings from the country of their residence.||Allow NRIs to manage income earned in India such as rent, dividend, interest etc|
|3.||Joint Account||Held jointly in the names of two or more NRI’s or PIO’s. Such NRI’s or PIO’s can hold NRE account jointly with a resident relative on former or survivor basis.||Held jointly in the names of two or more NRI’s or PIO’s. Such NRI’s or PIO’s can hold NRO account jointly with residents on former or survivor basis.|
|4.||Repatriability||Can be repatriated (Principal + Interes)||The interest amount (current income) is repatriable. However, balance in the NRO account (Principal) can be repatriated up to US$ 1 Million (April to March) together with their other eligible assets.|
|5.||Taxability||Interest earned in NRE accounts is tax free, that is, it is exempt from income tax in India.||NRO Deposits are taxable.|
|6.||Deposits and Withdrawals||NRIs/PIOs can deposit money in foreign currency and withdraw money in INR||NRIs/PIOs can deposit in foreign and Indian currency. However, they can withdraw money in INR.|
|7.||Exchange Rate Risk||Exposed to exchange rate risk||Not exposed to exchange rate risk|
Penalty for Failure to Convert to NRO Account
The moment your residential status changes to NRI, that is, you become a Non-resident Indian from a Resident person in India, you need to intimate the same to your bank.
In other words, if you are leaving India for taking up employment, undertaking business or vocation outside India or for any other purpose that suggests your intention to stay outside India for indefinite period, you need to intimate the same to your bank.
This is because the bank will convert your existing savings or current account into non-resident Ordinary (NRO) Account. In case, you fail to intimate about the change in your residential status to your bank, you will attract a healthy penalty for the same.
As per FEMA Act, 1999, if the NRI fails to get his existing account converted to NRO account, he is liable for a penalty of up to three times the amount involved in the breach of such a provision.
This is applicable where the amount involved in the breach of the provision can be quantified.
In cases where the amount involved cannot be quantified, the penalty for the breach of such a provision is up to Rs 2 Lakhs.
In addition to this, if the NRI continues to breach this provision, then, the penalty would be further extended to Rs 5,000 for each day after the first day during which such a breach continues.