The deposits in NRE and FCNR accounts are freely repatriable outside India without any upper limit. NRI’s are also allowed to remit funds outside India from their NRO account up to $1 million.
Many Indians going to work overseas do not realise the different requirements and restrictions under the income tax laws and foreign exchange laws. As per the Income-tax Act, 1961 (ITA), an Indian citizen who leaves India for the purpose of employment outside India may qualify as a non resident in India if his physical presence in India during a financial year is restricted to 181 days. But, as per the Foreign Exchange Management Act, 1999 (FEMA) a person who has gone out of India or stays outside India for or on taking up employment outside India, would qualify as non resident Indian (NRI) effective the date of leaving India.
An individual who would qualify as NRI under FEMA after departure from India may continue to qualify as a resident in India as per ITA, for remainder of that fiscal year. Such individuals should consider the taxability of interest in various bank accounts, repatriability of funds as well as other factors such as exchange risk.
As per FEMA, the individual needs to intimate his banker of this change in status to NRI on account of his employment overseas. His existing resident bank account in India would be re-designated as Non Resident Ordinary Rupee Account (NRO). Based on the I-T Act, banks are required to deduct tax at source on the interest paid to non-residents (ie residential status as per the ITA for each year) at the maximum marginal rate—currently 30.9%.
However, some banks practically deduct tax at maximum marginal rate from the date of change of status from resident bank account to NRO account (even if the individual continues to qualify as resident as per I-T Act for that fiscal year). While this tax withholding would relieve the taxpayer from paying advance tax on such interest income, NRIs whose total income is taxable at a lower slab rate or who have an effective tax rate which is much lower than 30% may end up in a tax refund situation and need to be aware of this.
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Individuals qualifying as NRI under FEMA can also open a Non Resident External Account (NRE) which is a rupee denominated account. The amount can be deposited in this account only by way of an inward remittance. The interest received in this NRE account is exempt from tax so long as the individual is a non-resident under the FEMA. While the interest rates given by banks on NRE deposits are generally similar to the interest rates given on resident account, since the balances in the NRE account are held in Indian rupees it is exposed to foreign exchange fluctuation risk.
If foreign exchange fluctuation risk is of concern, an NRI can also open a FCNR account which is maintained in foreign currency. While NRE account may be opened in the form of savings, current, recurring, or fixed deposit accounts, FCNR can be opened only in the form of time deposits. Interest from FCNR account is exempt from tax for the individuals who qualify as Non Residents or Not Ordinary Residents (i.e., residential status as per I-T Act).
The deposits in NRE and FCNR accounts are freely repatriable outside India without any upper limit. NRIs are also allowed to remit funds outside India from their NRO account up to $1 million per financial year as against a lower limit available for residents of $250,000 under the Liberalized Remittance Scheme.
Further, an NRI can fully remit his current income like rent, dividend, pension, interest on NRO account, etc., credited in NRO account subject to payment / deduction of appropriate tax. This is in addition to $1 million limit.
The writer is senior director, Deloitte Haskins & Sells. With inputs from Manish Shah, director and Vikas Birla, deputy manager, Deloitte Haskins & Sells LLP