Unlike regular citizens of India, NRIs cannot have standard savings accounts in Indian banks. There are three popular type of bank accounts an NRI could operate i.e. non-resident ordinary account, non-resident external account and foreign currency non-resident (B) account.
Whether you are a non-resident Indian (NRI) who is moving back to India or looking to invest in India, or you are a resident who has recently been granted NRI status, the first thing you need to do is have the right bank account to manage your money.
Unlike regular citizens of India, NRIs cannot have standard savings accounts in Indian banks. The determination of NRI status is not as per the popularly known Income-Tax Act, but FEMA (Foreign Exchange Management Act). FEMA uses intent as the basis to determine residential status. So, once you have moved residence (and child’s school) across the shores, this clearly denotes intention, and hence your residential status changes.
There are three popular types of bank accounts an NRI could operate:
1. Non-Resident Ordinary (NRO) – This is the savings bank account of the NRI, which can be funded in rupees or foreign exchange. For those moving abroad, after having worked in India, their resident savings account ought to be converted to an NRO account. This account can also have recurring or fixed deposits.
2. Non-Resident External (NRE) – The key difference from the NRO account is that this account needs to be funded only in foreign currency. The recurring and fixed deposit must have a minimum maturity period of one year. Power of attorney cannot be used to open an NRE account; the NRI account holder has to open this account on his own.
3. Foreign Currency Non-resident (FCNR (Banks)) - An FCNR (B) account is similar to opening a regular fixed deposit. You may close an FCNR (B) account prematurely; however, in order to earn any interest on the amount, the deposit must stay untouched with the bank for at least one year.
Recent amendments to the non-resident bank account rules in India do not permit the accounts to be held with resident Indians other than in 'former or survivor' status, which means that in their lifetime, only the NRI is authorised to operate the account.
Why should I have an NRO account?
NRO accounts are savings or current accounts which can be utilised by NRIs to manage the income they earn in India. This account holds currency in Rupees only. You can also use your NRO account to directly invest in mutual funds and shares.
There are no limitations on the type of credits you make to this account and it’s the only account type permitted for an NRI who’s looking to collect rents or receive dividends in India, as per RBI.
The money in NRO accounts are not freely repatriable, so it is best that you use this account for local spends. You can even opt for an NRO fixed deposit, especially if you’re not planning to use your accumulated funds anytime soon. This may help you earn better interest on savings.
Keep in mind that any interest that you earn in an NRO account will have 30 percent plus surcharge (if any) and cess, as TDS levied on it. However, if your country of residence is a part of the DTAA, then you can avail a lower rate of TDS; you will need to complete a few formalities and submit documents as prescribed by the RBI to do this.
The Double Tax Avoidance Agreement (DTAA) is a tax treaty signed between two or more countries to help taxpayers avoid paying double taxes on the same income.
Why should I have an NRE account?
As I mentioned earlier, NRO accounts are not freely repatriable. However, for many NRIs repatriation of funds is a critical need. The ability to freely repatriate funds outside India in any currency, and the fact that interest earned on NRE accounts is tax-free (in NRO accounts it is not), make these accounts very popular in the NRI community.
There are a few limitations though. The foreign currency is converted to Indian rupees, and hence subject to currency fluctuations. An important point to note is that any income earned in Indian rupees cannot be deposited to an NRE account. However, you can freely send funds from your NRE account to any other NRE account in India, or transfer them to a foreign account.
Why should I open an FCNR account?
The biggest advantage of operating an FCNR account is that these accounts can be maintained in a currency other than Indian rupees. This reduces the risk of currency fluctuation. It takes the form of term or fixed deposits. NRIs and persons of Indian origin (PIOs) can open FCNR accounts jointly with resident Indians, in which case the resident close relative operates the account as a power of attorney holder.
You can make unrestricted funds transfer to any NRE account for making payments in India. For FCNR accounts, the minimum tenure for you to gain interest is one year and the maximum period is five years. Another benefit that non-residents get is that you can hold FCNR accounts to maturity even if your residency status changes to a resident during the tenure of the deposit.
Of course, let’s not forget that every investor has his own needs and requirements. Make sure you talk to a certified financial planner before you make any crucial financial decisions.(The author is Managing Director and CEO of International Money Matters)