India offers a wide range of Banking facilities to the Indians, who have settled in abroad, also known as Non-Resident Indians and wants to invest/ park their money/income in India. Broadly, with the help of opening a Non- resident External (NRE) or Non- Resident Operating (NRO) account, the Banks in India facilitate the transfer of money of the NRIs in / from India. Through this article, we will explore the possibilities of how a Non- Resident Indian (s) can invest / park their money in India.
A. Non-Resident External Account (NRE):
A Non- Resident External (NRE) account is an account specifically designed for the Non-Resident Indians/ persons of Indian origins to park their foreign income / earnings in India. Generally, this account is for those NRI’s who are looking to invest in India. It is relevant to note that the funds deposited by the NRIs are fully repatriable and the interest earned from it are exempted in accordance with the provisions of the Income Tax Act.
B. Non-Resident Ordinary Account (NRO):
On the contrary, a Non- Resident Ordinary (NRO) account is generally preferred by those NRIs who already have an income source in India and are in dire need of retaining the same in India. This includes rental income, dividends, mesne profits or any other income derived from any means. Pertinently, the funds deposited are not fully repatriable, as there are certain restrictions on the transfer limits and the interest earned is also not fully exempted.
Importance of Non-Resident External (NRE) and Non-Resident Ordinary (NRO) Accounts in India
- Remission of Foreign Income to India: NRIs with the help of the NRE Account, can very well explore the possibilities of transferring the foreign earnings to their NRE account without facing any legal risk. Furthermore, the money can be utilized for investment purposes in India.
- Receiving income generated in India: NRIs with the help of the NRO account can receive the income generated through any source in India. This includes the rental income, dividend income, mesne profits etc. Therefore, with this mechanism in place, the NRIs can legally receive such income in their NRO account without facing any risk.
- Simplified Banking mechanism: Both the accounts have simplified the Banking for NRIs and has further made it convenient for the NRI to access and operate their accounts while staying abroad or being anywhere.
- Tax Liability: It is essential for the NRIs to examine their tax liability in India before choosing the appropriate category for opening the accounts in India. Pertinently, the interest earned from the remaining balance in NRE account are exempted from Income Tax in accordance with the provisions of the Income Tax Act, whereas as per the provisions of the Income Tax Act, the interest earned from the balance of the NRO account are not exempted from tax in India.
- Convenient Joint operations: A Non-Resident Indian at any point of time may want easy access to the funds available in NRI Account for their parents and family. Having joint operations in the account is the most used method to fulfil such requirements. However, NRIs/PIOs must note that while an NRE Account can be opened in joint name with NRI/PIO, it can be operated jointly with a resident Indian relative on ‘former or survivor’ basis.
Benefits and Limitations of Non-Resident External (NRE) Account and Non-Resident Ordinary (NRO) account in India
A. Non-Resident External (NRE) Account:
a) Tax exemption on interest earned.
b) Full repatriation of funds
a) Potential lower interest rates as compared with NRO account.
b)
Restriction on deposit- Only foreign earnings /income generated from abroad can be deposited in NRE account unlike the funds generated in India like rental income etc.
B. Non- Resident Ordinary (NRO) Account
a) Potential higher interest rates.
b) Management of income generated from local sources such as Income received from rent, mesne profits, and dividends etc.
a)
Limited Repatriation: NRIs can typically repatriate $1 million per financial year after paying applicable taxes on the principal amount being transferred.
b) No Tax exception on the interest earned on NRO account.
Difference between Non- Resident External (NRO) and Non-Resident Ordinary (NRO) Account
| BASIS |
NON- RESIDENT EXTERNAL (NRE) ACCOUNT |
NON-RESIDENT ORINARY (NRO) ACCOUNT |
| Purpose |
To Deposit and manage funds/ Foreign Earnings in India. Mainly for investment purposes. |
To manage funds/ income generated in India |
| Repatriation |
Funds deposited are fully repatriable along with the interest earned. |
Limited repatriation excluding the interest earned. |
| Currency risk |
No risk as such, the foreign currency is converted into Indian currency. |
No such risk, the funds are deposited and maintained in Indian currency only |
| Joint Holders |
Only allowed with another NRI. |
Allowed with the NRI as well as with the family members of the NRI. |
| Tax Liability |
Interest earned from the income are exempted from Tax. |
Interest earned from the income is subject to the provisions of the Income Tax Act and same is not exempted. |
Process of Operating/ Opening a Non-Resident External (NRE) and Non-Resident Ordinary (NRO) account in India
- The first and foremost step is to locate a Bank who offers facilities pertaining to NRE and NRO accounts.
- Once located, the next step would be to fill out an appropriate application form concerning NRE/ NRO account and submit the application along with the requisite documentation as per the requirement to the concerned Bank. In simple terms, the Applicant shall be required to fill out an appropriate form based on the purpose and nature of transaction and submit the form along with requisite documentation including but not limited to self-attested copy of the passport, declaration of NRI status, overseas address proof etc to the Bank for verification purpose.
- Upon submission of the form, the concerned official of the Bank shall verify the information provided and based on his/her review/decision, the account shall be created.
- In terms of the operation of the account, the NRI/ applicant will be required to transfer a minimum sum to the new bank account, as per the requirement of the bank. It is essential to comply with the requirements of the bank especially in the case of maintenance of balance in the NRE/ NRO bank account.
- Once the request gets fulfilled, the account will be completely functional, and the Non-Resident Indian will be able to operate the account easily.
Conclusion
It is advisable to take an expert guidance who has in-depth functional knowledge about proper procedure and operation of these accounts in India.
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