India offers a plethora of investment opportunities for non-resident Indians. For those looking for fixed income options, the Indian banking system offers bank accounts specifically serving the needs of the NRIS.
Typically, there are three types of NRI accounts – Non-Resident (External) Rupee Account (NRE Account), Non-Resident Ordinary Rupee Account Scheme (NRO Account) and the Foreign Currency (Non-Resident) Account (FCNR (B) Account)
One of the biggest difference between NRI accounts is that the NRE and NRO account are maintained in Indian Rupees, while the FCNR (B) Account can be in any permitted foreign currency, which is freely convertible.
The other big difference is the source of funds moving into such accounts. In the NRE account, only inward remittance for income earned overseas is allowed. In the NRO account, the income earned in India, such as rent, pension, and dividends can be deposited.
An NRE account is designed for parking foreign earnings with full repatriability and tax exemption on interest, whereas an NRO account is a rupee account meant to manage income accruing in India, with restricted repatriation and taxable interest.
FCNR accounts, in contrast, are foreign currency-denominated term deposits that insulate NRIs from exchange fluctuation risk, which is precisely why they are treated differently in both currency exposure and regulatory flexibility,” says Sonam Chandwani, Managing Partner, KS Legal & Associates.
Non-Resident External (NRE)
The purpose of Non-Resident External (NRE) Savings Accounts and Fixed Deposits is to save or deposit foreign earnings in Indian currency. NRE deposits are only available for income earned overseas. Earnings earned in India cannot be deposited into this account.
This bank account allows NRIs to deposit overseas earnings in Indian rupees and can function as a current, savings, or fixed deposit account. An NRE account can be jointly owned by an individual and an NRI.
This includes interest accruing on the account, interest on investment, transfer from other NRE/ FCNR(B) accounts and even the maturity proceeds of investments if such investments were made from this account or through inward remittance.
NRO account
If NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) have income generated within the country, they can open an NRO account. NRO account is a rupee-denominated bank account that can be used to deposit income generated in India, including rent, dividends, pensions, gifts, and proceeds from the sale of real estate.
FCNR (B) Deposits
NRIs who want to earn a higher rate of interest on their savings than is available in their home country can open an FCNR (B) account in India. However, unlike NRE and NRO accounts, FCNR (B) accounts are only in the form of Term Deposit for terms not less than 1 year and not more than 5 years.
Taxation
In the case of NRE and FCNR (B) account, the income earned in the accounts is exempt from income tax and the balances are exempt from wealth tax. Also, both interest earned and the capital amount is fully Repatriable.
However, interest earned in the NRO account is taxable and not repatriable except for all current income. Also, the balance in an NRO account of NRIs is remittable up to USD 1 million per financial year (April-March).
At times, some investors may want to make use of more than 1 account to maximise interest earnings. “The commonly cited narrative that FCNR returns of approximately 5% combined with INR depreciation of almost 4% translate into an effective 10% tax-free return” is conceptually flawed.
FCNR deposits are maintained and repaid in foreign currency, and the depositor does not actually realize INR depreciation unless and until funds are converted into rupees. Therefore, any notional gain from currency movement cannot be treated as a realised return in INR terms without an actual conversion event, and even then, it is contingent on timing and exchange rates rather than being a fixed yield,” informs Chandwani.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. The views and opinions expressed by the individuals quoted herein, if any, are their own and do not necessarily reflect the views of the publication. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions. Financial Express is not responsible for any decisions made based on this information.