In my opinion, NRI bank account is one subject wherein the NRI’s are not able to comprehend the need and requirement. Typically an NRI bank account is opened based on the recommendation of a bank staff. The bank executive depending on branch’s monthly targets suggest an account without accessing the need or requirement of an NRI. I touched this topic briefly in my previous post on 5 Financial Points to consider when you become a Non Resident Indian. As i mentioned that it is very critical to understand the requirement before you decide on the type of NRI bank account.
Before i proceed, i would like to clarify that there is NO Right or Wrong Answer on topics related to a bank account. The answer depends on the understanding of an individual. For example, i know many professionals who receive business income in Savings Account. The thumb rule says you should open a current account for the business income. The counter justification is that it is perfectly okay till you are paying your taxes on time. Trust me there is NO hard and fast rule in this regard. Therefore, it is important to identify the right type of NRI bank account.
The Most Appropriate NRI Bank Account Based On Your Requirement
There are 3 types of NRI Bank Account, let’s check each of them
1. NRO or Non Resident Ordinary Account:
Recently i received a query from one of the clients. He is earning rental income from his 2 properties in India. Nothing wrong with it but he was accepting payment in Indian Savings Account. In this case, any income from India to be retained in Indian Rupee should be accepted in NRO account by the NRI’s. Please note that certain income like salary, rent, dividend etc of an NRI can be deposited only in NRO account. Such income cannot be deposited in NRE account.
NRO account can also be opened by PIO (Person of Indian Origin) and OCI (Overseas Citizen of India). An NRO account can be a savings or current account. The interest earned on NRO savings account is taxable.
Banks also provide DTAA facility on NRO accounts. The average monthly balance varies from bank to bank. It can be as low as Rs 10,000 and it can go as high as Rs 75,000 as per my knowledge. It all depends on the benefits and features linked to the bank account. As i mentioned in my previous post also that you can convert exist savings or current account to NRO Savings or NRO current account. You only need to submit a request with the bank to re-designate the account.
You can repatriate up to 1 Mn USD every financial year from NRO account after TDS or payment of tax dues. You can also open a joint NRO account with Resident Indian or NRI. The document requirement varies for OCI, PIO, NRI, Students and Seafarers.
2. NRE or Non Resident External Account:
In layman terms, if you wish to remit money from the country of residence/overseas to India then NRE Account is the one for you. It is basically opened for inward remittances to India. Similar to NRO account, it is rupee denominated account. For example, NRI remitted 1L USD through NRE account. In this case, 1L USD will be converted to Indian Rupee say at an exchange rate of Rs 66 = 1 USD. Therefore, the balance of NRE account will be INR 66L.
One of the disadvantages of NRE account is foreign exchange fluctuation. This situation arises if in future you would like to withdraw from NRE account in foreign currency or repatriate/remit the money back to the country of residence/overseas. Taking the same example, you deposited 1L USD in NRE account and balance is 66L. Assuming rupee devalue against the dollar and at the time of withdrawal the foreign exchange rate is 1 USD = Rs 69. In this case, you will get only 95652 USD. Therefore, you deposited 1 Lac $ but received 95652$ thus loss of 4348$. In other words, your holding depreciates by 4.3% equivalent to the devaluation of Indian currency. You can also include the loss due to a commission charged by the banks for such conversions.
Now you must be wondering what if rupee appreciates to Rs 62 against the dollar then i will receive more dollars and my holding will appreciate. In such a scenario among NRI Bank account choices, NRE account is most suited for the NRI’s. I do agree but the possibility of same is almost NIL. In India, the foreign currency exchange rate is tightly monitored by RBI. The RBI infuse or soak liquidity if the foreign currency exchange rate moves outside comfortable level due to demand-supply mismatch.
Lastly, the govt has to maintain trade balance. The sharp appreciation of rupee will make Indian exports unviable. Recently there were news reports that Govt is planning to depreciate Indian rupee to support “Exports”. As i keep highlighting that in my opinion, the Indian Rupee will only depreciate from current levels. According to experts, fair market value of Indian rupee is Rs 72 against the dollar.
Considering the above-mentioned facts if you are planning to withdraw the money from NRE account in foreign currency in future then the NRE account is not suitable based on your requirement. Now to avoid the risk of foreign exchange fluctuation, FCNR account comes into the picture.
3. FCNR (Foreign Currency Non Resident) Account:
In this type of NRI Bank Account, deposits can be maintained in foreign currency. Similar to NRE account, FCNR account is also fully repatriable. This account is similar to NRE account except following 3 differences
A. Deposits in FCNR account are maintained in foreign currency whereas in NRE account deposits are in Indian Rupee. Therefore, FCNR account is not subject to fluctuation in foreign exchange rates.
B. Deposits in FCNR are maintained as time deposits whereas NRE account can be maintained as a current account or savings account.
C. The interest from FCNR account is non-taxable in India only for NRI and Not Ordinarily Resident. The interest is taxable for OCI’s and PIO’s.
What is the difference between NRE and NRO Account?
Now you must be wondering what is the difference between NRE Account and NRO Account & which one is suitable for me?
1. The limit on repatriation of funds from India: The funds from NRE Account are fully and freely repatriable outside India. There is NO LIMIT. In the case of NRO Account, the max limit is 1 Million USD. Secondly, the bank may ask for undertaking along with CA certificate if you place repatriation request under NRO account.
2. Interest: The interest earned on NRE account is tax free under FEMA. The reason being as the NRE account is predominantly for inward remittance, therefore, it is already taxed in the country of residence.
3. Income from India in Indian Rupee cannot be deposited in NRE account.
4. NRE account is 100% tax free in Indian. NRE account is more beneficial if an NRI is staying in a country where the tax rates are low or NIL tax on income.
Please note that both the NRI Bank Account i.e. NRO and NRE can be re-designated to normal savings or current account if the status change from NRI to resident Indian.
The choice of NRI Bank Account depends on the need and requirement. NRO account is suitable for Indian Income to be retained in Indian Rupee and there is no intent to remit the money overseas. NRE account is suitable for permanent inward remittance from the country of residence to India. Whereas FCNR account is suitable if in future you intend to remit back the money overseas or country of residence. You can also hold more than one type of NRI Bank account simultaneously. For example, it is very common to hold NRO and NRE account. Not many NRI’s prefer FCNR account though it is the best hedge against foreign exchange fluctuation.
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