• Investment Basics, NRI Investment, Personal Finance
  • 12 min read
  • By altGraaf
  • Jun 10, 2024

Most Non-resident Indians (NRIs) earn and save in foreign currencies like dollars, euros, or pounds but often have financial needs in India, such as banking or investments. An NRI account is designed to meet these specific needs, providing banking services.  Whether they’re sending money to loved ones, investing in new opportunities, or managing savings from abroad, an NRI account acts as a link between life overseas and ties back home.

Indian banks and financial institutions offer NRI accounts with services like remittances, currency exchange, and taxation guidance, making it easier for NRIs to handle finances both in India and abroad. In this blog, we’ll explore the features and benefits of an NRI account in detail.

Who Needs an NRI Account? Understanding Residency Status in India

Before determining whether you need an NRI account or not, it’s essential to understand how your residency status is determined under the Indian tax laws. Your residency status directly impacts how you manage your finances in India whether as a resident or a Non-resident Indian (NRI). This classification directs your tax obligations and the type of bank accounts you should use to handle transactions between India and your country of residence.

Residency Status in India: A Rundown

According to the income tax rules of India, both an Indian citizen and a person of Indian origin residing outside India can be considered residents of India if they meet the following conditions:

  • If they stay in India for 182 days or more in the previous financial year, or
  • If they stay in India for at least 365 days over the last four years and 60 days or more in the current financial year.

These days can be accumulated over multiple visits to India. Meaning that even if you make several short trips to India, the total number of days you spend in the country will be considered. If you meet the required number of days, you will be classified as a resident for tax purposes. Once an individual qualifies as a resident, their global income may be taxed in India. If not, they will likely be considered an NRI, which will influence their need for specific NRI accounts.

Deemed Resident Status

In case you don’t meet the standard criteria to be classified as a resident, you could still be treated as a resident under the Deemed Resident rule. This applies to Indian citizens whose total income exceeds ₹15 lakhs in a financial year (excluding foreign-sourced income). If you have stayed in India for at least 120 days during the financial year and are not treated as a tax resident in any other country, you will be considered a resident for tax purposes in India. This ensures that individuals with significant earnings, who are not paying taxes in another country, are taxed in India for their time spent here.

This refers that if you aren’t paying taxes elsewhere and spend enough time in India, you cannot avoid being taxed in India on your income.

Non-Resident Status in India

If an individual does not meet the conditions to be classified as a resident (including the standard and deemed resident criteria), they will be considered a Non-resident Indian (NRI). Once you are categorized as an NRI, the next step is to determine which specific NRI accounts you need to manage your finances efficiently between India and your country of residence. These accounts, such as NRE (Non-Resident External) and NRO (Non-Resident Ordinary), help you handle income and transactions in both countries smoothly.

What is an NRI Account?

NRI accounts are banking facilities specifically designed for Indian citizens living abroad. These accounts enable NRIs to manage foreign income, invest in Indian assets, and conduct financial transactions while complying with foreign exchange regulations. They come in various forms to cater to the diverse financial needs of NRIs, ensuring easy repatriation of funds and tax benefits.

Types of NRI Accounts

NRIs can open three main types of accounts in India:

NRE Account (Non-resident External) 

  • 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 your 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 

NRO Account (Non-Resident Ordinary) 

  • 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 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
  • As mentioned above, NRIs can manage their Indian investments more smoothly through their NRO account
  • One cannot directly deposit foreign currency earned abroad into NRO account. If they want to deposit foreign earnings, they must convert them to rupees first. This conversion will happen at the prevailing exchange rate

FCNR Account (Foreign Currency Non-Resident) 

What is an 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 an FCNR (B) Account?

  • An FCNR (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 the 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

Difference between NRI Accounts: NRE, NRO, and FCNR (B) Account 

Basis of DifferenceNRE AccountNRO AccountFCNR (B) Account
Repatriation of FundsPrincipal & Interest fully repatriableGenerally, 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 AccountYes (with resident Indian relative, “Former or Survivor” mode)Yes (with resident Indian relative, “Former or Survivor” mode)Not available with Indian residents. Joint accounts option available for NRIs
Investment in IndiaOne can invest but cannot receive repayments from India in an NRE accountYesNot directly
Minimum BalanceThis may vary from one bank to anotherMay differ from one bank to anotherThis may vary from one bank to another
Interest RatesGenerally lower than FCNR (B)Usually higher than NRE and FCNR (B)Generally higher than NRE and lower than NRO
Account TenureSavings or Fixed- Deposit accountSavings accountFixed deposit (1-5 years)

NRI Account Benefits

Enables Investment in India

NRI accounts play a crucial role in allowing non-resident Indians to invest in India seamlessly. Given that most NRIs earn and save in foreign currencies, these accounts enable them to convert and deposit those funds into Indian investments such as stocks, real estate, or mutual funds. By facilitating access to various investment opportunities

Loan Facility

Another significant benefit of NRI accounts is the availability of loan facilities. Many banks offer loans to NRIs against the deposits held in NRE or FCNR accounts. This means that NRIs can leverage savings in India to obtain funding for various purposes, such as buying property, funding education, or starting a business. The ability to access loans in India while residing abroad provides financial flexibility and helps NRIs meet needs without the complexities often associated with obtaining loans from foreign financial institutions.

Avoidance of Exchange Rate Fluctuations

NRI accounts help mitigate the risks associated with exchange rate fluctuations, which can significantly affect the value of funds when transferring money between countries. By allowing NRIs to hold their deposits in Indian rupees or foreign currencies, these accounts provide greater control over their finances.

For instance, an NRI can choose to maintain their savings in a stable currency and convert it to rupees when favourable exchange rates arise. This strategic approach to managing funds minimises potential losses due to adverse currency movements, ensuring that NRIs can maximise the value of their investments and savings in India.

Attractive Returns

The interest rates offered on NRI accounts, particularly the FCNR (B) accounts, can provide attractive returns compared to standard savings accounts. These accounts typically offer market-linked interest rates that align with prevailing market conditions, ensuring that NRIs receive competitive returns on their deposits.

Additionally, the tax-free status of interest earned on NRE and FCNR accounts enhances the overall appeal, allowing NRIs to grow their wealth without the burden of tax deductions. This combination of favourable interest rates and tax benefits makes NRI accounts a lucrative option for managing and growing savings in India.

Taxation Rules for NRI Accounts 

  • Interest earned on NRE accounts is tax-free in India
  • Interest earned on NRO accounts is taxable in India. TDS will be deducted before crediting interest to the account
  • Interest earned on FCNR (B) deposits is generally tax-free in India
  • Double Taxation Avoidance Agreements (DTAAs): India has DTAAs with many countries, which can help avoid double taxation on income earned in India

How to Open an NRI Account 

Step 1: Choose the Right Account Type

Decide which type of NRI account you want to open between NRE, NRO and FCNR

Step 2: Select a Bank

Research different banks that offer NRI accounts. Compare their interest rates, fees, services, and account features. Popular banks for NRI accounts in India include State Bank of India, HDFC Bank, ICICI Bank, Axis Bank etc.

Step 3: Gather Required Documents

Prepare the necessary documentation, which typically includes:

  • 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

Step 4: Visit the Bank or Apply Online

You can either visit a branch of the chosen bank in India or apply online through their website. Most banks offer an online application process for NRI accounts

Step 5: Fill Out the Application Form

Complete the application form provided by the bank. Ensure all details are accurate and match the documents you’ve prepared

Step 6: Submit Documents

Submit the application form along with the required documents. If applying online, you may need to upload scanned copies of your documents

Step 7: Verification Process

The bank will review your application and verify your documents. This process can take a few days to a couple of weeks, depending on the bank

Step 8: Account Activation

Once your application is approved, the bank will inform you via email or SMS. Your NRI account will be activated, and you will receive your account details, including the account number and any debit cards

Step 9: Fund Your Account

Transfer funds into your NRI account through various means, such as remittances from your overseas bank account or deposits in foreign currency

Step 10: Start Managing Your Account

Once your account is active and funded, you can begin using it for various purposes like investments, remittances, and financial transactions in India

Who Should Open an NRI Account in India?

The eligibility criteria for opening an NRI account varies 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

Choosing the Right NRI Account for Your Needs 

Choosing the right NRI account involves evaluating various factors. Here are some tips to help you make an informed decision:

  • Understand Your Financial Goals: Before choosing an NRI account, clearly define your financial goals. Are you primarily looking to save for future investments, manage expenses in India, or send money back home? Understanding your goals will guide you toward the most suitable account type.
  • Consider Interest Rates and Fees: Compare the interest rates offered by different banks for NRE, NRO, and FCNR accounts. Also, check for any fees associated with account maintenance, transactions, or withdrawals. Look for accounts with competitive rates and minimal fees to maximize your returns.
  • Check Bank Reputation and Services: Research the bank’s reputation, customer service, and online banking facilities. Choose a bank that offers reliable services and has a track record of providing excellent customer support to NRIs.
  • Assess Joint Account Options: If you plan to open a joint account with an Indian resident, consider the options available. Some banks allow joint accounts with NRE accounts, while others may offer different configurations.

Final Thoughts:

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.

NRE accounts are ideal for managing foreign income and repatriating funds to your home country.

NRO accounts are suitable for managing income earned in India, such as rental income or dividends, while you reside abroad.

FCNR (B) accounts are perfect for those who want to maintain deposits in foreign currency and benefit from high interest rates. Ultimately, the decision to open an NRI account should be based on your unique financial needs and goals.

FAQs

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, residency status and tax implications might change upon return. It’s advisable to consult a tax advisor for future scenarios.

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.

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.

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