Residency Status in India: A Rundown

According to the income tax rules of India, a citizen of India or a person of Indian Origin who is residing outside India is considered a RESIDENT of India if:

They stay in India for 182 days or more during the financial year OR
The individual has stayed in India for at least 365 days during the 4 years preceding the financial year AND at least 60 days in that year.

Please note that these days can be accumulated over multiple visits to India. Based on the residency status of an individual, one can decide whether or not to open the NRI accounts.

Deemed Resident Status

It’s crucial to understand that even if one does not meet the conditions mentioned earlier for being a resident, there’s a concept called ‘deemed resident’. This applies to an individual citizen of India with a total income (excluding income from foreign sources) exceeding Rs 15 lakhs during a financial year. In this scenario, if they are not a tax resident of any other country, they will be deemed a resident in India for that year if they have stayed in India for 120 days.

Non-Resident Status in India

If an individual does not meet the above-specified conditions, they will be considered as a NON-RESIDENT INDIAN (NRI).

Now that we have established who an NRI is per Indian taxation rules let’s understand which NRI accounts an individual needs to have to manage their money smoothly in India and their country of residence.

Types of NRI Accounts

In India, Non-Resident Indians (NRIs) can open three different types of accounts: a Non-Resident External Account (NRE), a Non-Resident Ordinary Account (NRO), and a Foreign Currency Non-Resident (FCNR) bank Account. NRIs can open these accounts depending on their income source, either from India or their residing country.

The three types of accounts that NRIs can open in India are the Non-Resident External Account (NRE), Non-Resident Ordinary Account (NRO), and Foreign Currency Non-Resident (FCNR) bank Account.

What is an NRE Account?

An NRE account is a bank account in India designed for NRIs. Indian banks allow depositors to maintain the account in foreign currency or Indian rupee.
The principal and interest are fully repatriable, i.e., transferable. This means one can freely transfer them from the NRE account to a foreign account without restrictions.
The interest earned on an NRE account is non-taxable in India.
NRIs can have a joint NRE account with a relative who is an Indian resident with the mode of operation of ‘Former or Survivor’.
NRIs can use an NRE account to invest in Indian investment instruments. However, they cannot receive repayments on their investments in the form of maturity amounts or receive other earned income in India into the NRE account. So, to make investments in Indian instruments smoothly, NRI individuals need to have an NRO account

What is an NRO Account?

An NRO or Non-Residential Ordinary Account can be opened with income earned within India. The account will be held only in Indian rupees.
The NRO account is non-repatriable, which means that the transfer of funds back to a foreign residence bank account is limited.
One cannot directly hold money earned in any foreign currency in an NRO account. NRO accounts are designed for NRIs to hold their rupee-denominated income in India. The income source can be rent, dividends, etc.
Interest income earned on the amount in an NRO Account is liable for TDS or Tax Deductible at Source.
As mentioned above, NRIs can manage their Indian investments more smoothly through their NRO account.
One cannot directly deposit foreign currency earned abroad into their NRO account. If they want to deposit their foreign earnings, they must convert them to rupees first. This conversion will happen at the prevailing exchange rate.

NRO accounts are not designed to directly manage income earned abroad in foreign currency. They can help an NRI individual manage the rupee-denominated component of the overall income.

What is FCNR (A) Account?

An FCNR (Foreign Currency Non-Resident) (A) Account was an old scheme introduced in 1975. It allowed NRIs to deposit their foreign currency earnings in India and earn interest. However, the RBI guaranteed the exchange rate at the time of deposit. So, if the exchange rate between foreign currency and rupees changed, the government had to cover the difference. This was beneficial for NRIs but cost-intensive for the government when the rupee weakened.

Since the FCNR (A) scheme was too expensive for the government to maintain, it was replaced by FCNR (B) on May 15, 1993.

What is the FCNR (B) Account?

An FCNR (B) account, or Foreign Currency Non-Resident (B) account, is a fixed deposit account for a tenure of 1-5 years, specifically for NRIs. It allows them to deposit their foreign currency earnings and benefit from the interest. Since the government does not have to shoulder the exchange rate risk in the FCNR B) account, it can offer NRIs better interest rates on their FCNR (B) deposits.
Like an NRE account, the funds in an FCNR (B) account and the interest earned are tax-free in India.
One can easily transfer funds between their NRE account and the FCNR (B) account or vice versa without restriction. They can also directly remit funds from their overseas bank account to open an FCNR (B) account in India.
No restrictions exist on how much money one can deposit in their FCNR (B) account.
The principal amount in the term deposit and the interest earned are fully repatriable, so there are no restrictions on transferring the funds back to a foreign residence account.
According to Foreign Exchange Management Act (FEMA) regulations, banks can accept FCNR (B) deposits in any freely convertible currency. However, one should consult with the respective bank before opening the FCNR (B) account with the permissible currencies to be safe. All major currencies are supported, including US Dollars, Great Britain Pounds, Australian Dollars, Canadian Dollars, Euros, UAE Dirham, and Singapore Dollars.

Comparison between NRE, NRO, and FCNR (B) Account

Basis of Difference	NRE Account	NRO Account	FCNR (B) Account
Account Purpose	To send money earned abroad to India, take care of dependents, manage the funds in India via fund transfers or investments and repatriate funds whenever required	Manage income earned in India while staying abroad.	Earn interest on foreign currency deposits
Deposit Currency	Foreign currency or Indian currency depending on the depositor’s decision and the bank’s policies	The money must be managed in INR as it is inherently a rupee-denominated account.	Various foreign currencies (USD, EUR, GBP etc.)
Interest Taxation	Tax-free in India	Taxable in India (TDS applies)	Generally tax-free in India
Repatriation of Funds	Principal & Interest fully repatriable	Generally, not repatriable. Option exists to repatriate up to USD $1 million including taxes during an assessment year.	Principal & Interest are fully repatriable in foreign currency
Joint Account	Yes (with resident Indian relative, “Former or Survivor” mode)	Yes (with resident Indian relative, “Former or Survivor” mode)	Not available with Indian resident. Joint accounts option available for NRIs
Investment in India	One can invest but cannot receive repayments from India in an NRE account	Yes	Not directly
Minimum Balance	This may vary from one bank to another	May differ from one bank to another	This may vary from one bank to another
Interest Rates	Generally lower than FCNR (B)	Usually higher than NRE and FCNR (B)	Generally higher than NRE and lower than NRO
Account Tenure	Savings or Fixed- Deposit account	Savings account	Fixed deposit (1-5 years)

NRI individuals have the freedom to open NRI accounts with any authorised bank. Moreover, FEMA regulations do not prohibit NRIs from maintaining multiple account types or having more than one account within the same category of NRI accounts.

Documents required to open NRI accounts in India.

Valid Passport:
Proof of Residence: Some banks might ask for documents like a utility bill, rental agreement, or bank statement from their resident country to verify their address.

PIO/OCI Card (if applicable)
PAN Card – One can apply for Form 60 if they don’t have a PAN card.
Employment Details (in some cases): Some banks might request employment details, particularly for FCNR (B) accounts.
Bank Statements (from the resident country): Some banks might ask for this if individuals already don’t have an account.

It’s essential to check the chosen bank for its latest eligibility criteria and the documents required to open a specific NRI account (NRE, NRO, or FCNR). These requirements might vary slightly depending on the bank’s internal policies.

Who should open an NRI account in India?

The eligibility criteria for opening an NRI account vary depending on the account and the bank. However, individuals with the following purposes should open an NRI account.

If they have income sources in India, such as property rent, an NRO account will let them manage those funds conveniently.
If they must support their dependents in India, they should consider opening NRI accounts for remittances.
If they want to invest and grow their wealth in the vibrant Indian economy, they can open an NRO account, make investments and receive repayments.
Additionally, if an individual meets the conditions of being an NRI and can show the purpose of his stay, they can open an NRI account based on their requirements.

Tax Implications of NRE, NRO and FCNR Accounts in India

Interest earned on NRE accounts is tax-free in India.
Interest earned on NRO accounts is taxable in India. The bank will deduct TDS at the prevailing rate (usually 10%) before crediting the interest to the account. If they file a tax return in India and their total income falls under the tax exemption bracket, they can claim this tax return.
Interest earned on FCNR (B) deposits is generally tax-free in India.
Double Taxation Avoidance Agreements (DTAAs): India has DTAAs with many countries. These agreements can help avoid double taxation on income earned in India.

Conclusion

Choosing the right NRI account primarily depends on the depositor’s individual needs. NRE accounts are ideal for managing foreign income in India and repatriating funds. NRO accounts help manage income earned in India while staying abroad. FCNR (B) accounts offer high interest rates on fixed foreign currency deposits. So opening NRI accounts entirely depends on the individual’s use case. We hope this guide helped you understand the characteristics of all three NRI accounts and make an informed decision based on your requirements.

FAQs

1 What is the difference between NRE and NRO accounts?

An NRE account holds denominations in Indian rupees or foreign currency based on the depositors to maintain the account in foreign currency or Indian rupee. Interest earned is tax-free, and principal and interest are fully repatriable (transferable abroad).
An NRO account is an INR-denominated account. NRIs primarily use this account to deposit income earned in India (rent, dividends, investments, etc.). Interest is taxable, and funds cannot be directly deposited in foreign currency. There are repatriation limitations on the NRO account.

2. Can I open an NRI account if I plan to return to India soon?

There is no legal restriction on opening an NRI account if an NRI plans to return to India. However, their residency status and tax implications might change upon their return. It’s advisable to consult a tax advisor for future scenarios.

3. Which NRI account offers the best interest rates?

Interest rates can vary between banks and account types (NRE, NRO, FCNR). Customers should compare rates from different banks for the specific currency and tenure they are interested in. An NRO account typically has the highest interest rate, followed by an FCNR and NRE account.

Can I hold NRI accounts jointly with someone in India?

One can have a joint NRE or NRO account with a resident Indian relative with the “Former or Survivor” operation mode. However, this joint account option with resident Indian is unavailable for the FCNR account.

4. What are the tax implications of NRI accounts?

Interest on NRE accounts is tax-free in India.
Interest on NRO accounts is taxable in India.
FCNR (B) deposits and interest are generally tax-free in India.

References:

https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=780

https://www.dbs.com/in/treasures/articles/nri-hub/live-enriched/difference-between-fcnra-and-fcnrb

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