What is an Indian NRI account? www.deekpay.com

existIndiaThere are three types of accounts that a Non-Resident Indian (NRI) can open: NRE account, NRO account and FCNR (B) account.

These NRI accounts can only be opened by individuals who have resided outside the geographical territory of India for at least 120 days in a year and have stayed in India for less than 365 days in the last four years. This is because the residency status of such individuals is changed to NRI under the Income Tax Act, 1961 However, if an individual leaves India for employment in another country, he/she shall be declared as NRI immediately.

Under another condition, an individual has to be present in India for less than 4 out of 10 years to be categorised as a Non-Resident Indian (NRI). This is an adjustment introduced in the Union Budget 2020, where the earlier categorisation considered 2 years instead of 4 years and 182 days instead of 120 days.

It is important for NRIs to understand the various features of the three types of bank accounts they can use in India. This helps to fully realise their investment objectives, financial obligations and residency plans.

NRIs can open these accounts with income from within India or from the country of residence, depending on the type of NRI account.

NRI India Account Type

As mentioned earlier, there are three types of accounts available to NRIs in India: the NRE stands for Non-Resident External Accounts, the NRO stands for Non-Resident Ordinary Accounts and FCNR (Foreign Currency Non-Resident) Bank Accounts.

The basic differences between these types of accounts are listed below:

NRE accounts

NRIs may open and maintain Non-Resident External or NRE Accounts with income sourced from the country of residence of the respective individuals, which shall be held in Indian Rupee denomination.

For better understanding, let us consider the following example: Ms Avantika is working in Paris, France, but her mother, a dependent, lives in Mumbai. She sends 2000 Euros to her mother every month to her NRE account, which is deposited in Indian currency. Therefore, considering that the prevailing exchange rate for the month is 1 Euro = 80 Indian Rupees, the 2000 Euros she remits will be deposited in her NRE account as 1,60,000 Indian Rupees.

NRO account

NRO or Non-Residential Ordinary Account can be opened with income earned in India and deposited in Indian Rupee denomination in this deposit account. The source of income can be rent, dividend, etc.

For example, Mr Rahul, a Non-Resident Indian (NRI) residing in Newark, USA, has a flat in Mumbai which he has leased to Mr Arman. To receive rental income from such a lease, Rahul must open an NRO account into which Arman should regularly deposit the required amount of rent.

No currency conversion is required as the deposits in the NRO account are made in Rupee denomination.

FCNR (B) Account

FCNR or Foreign Currency Non-Resident Account facilitates deposits by Non-Resident Indians (NRIs) or Persons of Indian Origin (POIs).NRIs or POIs can make these deposits in the currency of their country of residence and should be RBI Any of the specified foreign currencies are held in the account.

Deposit currencies that can be held in the FCNR (B) account include: United States Dollar (USD), Canadian Dollar (CAD), Australian Dollar (AUD), Euro (EUR), Pound Sterling (GBP), Singapore Dollar (SGD), Hong Kong Dollar (HKD), Japanese Yen (JPY) and Swiss Franc (CHF).

Thus, for example, if an individual earns income in any of the above currencies, his/her deposits in the FCNR (B) account need not be converted. On the other hand, if an individual earns income in any other currency, deposits made in any other currency should be converted into any of the prescribed currencies mentioned above.

Differences between NRI accounts in India

The following table shows the main differences between the three NRI accounts.

Difference Parameters NRO Account NRE Account FCNR (B) Account Deposit Currency Indian Rupees (INR) Indian Rupees (INR) USD, CAD, AUD, HKD, SGD, EUR, GBP, CHF, JPY Account Purpose A Non-Resident Indian (NRI) can open an NRO account to deposit his/her income originating from India in Indian Rupees. A Non-Resident Indian (NRI) can open a Non-Resident Indian (NRI) account to deposit his/her income from his/her country of residence in Indian Rupees. A Non-Resident Indian (NRI) can open an FCNR account to deposit his income from his country of residence in any of the above nine currencies. Taxable nature Both principal and interest are taxable. The entire balance (interest + principal) is exempt from tax. interest earned on FCNR deposits is exempt from tax. Account Type An individual can open a savings, current or time deposit account under this category.NRE Account Convenience Savings, current and time deposit accounts. Only time deposit accounts can be opened with a minimum tenure of 1 year. Joint account setup It can be opened with another NRI or resident Indian. It can be opened only by another NRI. It can be opened only by another NRI. Balance repatriation Interest income can be repatriated in full. The maximum principal amount that can be repatriated in a financial year is USD 1 million or its equivalent. All balances can be repatriated in full. All balances are repatriable in full. The term of the time deposit depends on the financial institution. The maturity of FCNR time deposits ranges from 1 to 5 years. Exchange rate is not affected by the prevailing exchange rate. Subject to prevailing exchange rates. Subject to prevailing exchange rates if currency conversion is involved and vice versa.

Eligibility Criteria and Required Documents to Open an NRI Account

The eligibility criteria for opening NRE, NRO and FCNR (B) accounts depend on the respective banks. However, every financial institution in India follows specific eligibility criteria for NRI accounts. The following categories of individuals can open these accounts:

Should be employed, own a business or engage in some form of trade in a foreign country. Employment should be with the Indian Navy, a foreign-registered airline, an oil rig or an overseas shipping company, and the individual is required to be outside the domestic territory of India for at least 182 days. Government employees holding Diplomatic Passport. Students educated abroad.

Documents required for an NRI account:

Application form. Photocopies of different pages of passport containing details such as name, address, date of birth, date of issue and expiry of passport. Proof of Employment. Work permit, student visa, visa permit, work visa or residence visa. KYC documents (if any).

Several other forms may be required to open an NRI account, depending on the financial institution involved.

Advantages of NRI Accounts in India

Promoting investment in financial instruments

One of the main advantages of NRI accounts is that individuals can participate in stock market trading and different investment schemes through them. Such investments are facilitated through Portfolio Investment Schemes (PIS) or NRI portfolio investments offered by financial institutions.

This is an RBI scheme that allows NRIs to trade market-linked financial instruments (e.g., equities) or debt instruments (e.g., corporate bonds) through their NRI accounts.

Tax incentives

Individuals with NRE and FCNR (B) accounts are entitled to tax-free interest income on their deposits under the Income Tax Act, 1961.

However, if the NRI does not have a tax liability to any other country, such worldwide gain will be taxable in India based on its domicile or residence under the Union Budget Proposal, 2020.

high return

NRIs who choose to deposit their funds in any fixed deposit account, such as NRE FD or FCNR, can enjoy considerable returns on their total deposits; the risk is negligible as such accounts are not potentially linked to stock market fluctuations.

Avoidance of exchange rate fluctuations

Individuals have the option of depositing their income from abroad in the FCNR without having to convert such income into Indian rupees. This facility enables NRIs to avoid exchange rate fluctuations and consequent reduction in the value of their deposits.

Disadvantages of NRI accounts

low mobility

Individuals who choose to invest in FCNR to protect their finances from exchange rate fluctuations may only choose to open a time deposit account with a maturity of one to five years.

Risk-prone

Foreign currency deposits in NRE accounts are required to be converted into Indian rupees. As a result, the value of such deposits may fluctuate due to appreciation of the home currency (or depreciation of the foreign currency), thereby incurring losses on repatriation.

Even though such accounts offer an early withdrawal option, the cancellation of such time deposits before one year would result in the disappearance of the interest income on such deposits.

Who should open an NRI account?

Individuals with a source of income in India can open NRO accounts to deposit these funds.

In addition to this, NRIs who have family members in India or are planning to return after a certain period of time should open NRI accounts to facilitate remittances.

In addition, individuals wishing to participate in trading in the Indian stock market should also open NRI accounts for such trading.

However, it is important to note that these three types of NRI accounts have different terms and conditions and fulfil different currency requirements.

Further, these terms may vary slightly from one financial institution to another. Therefore, an individual should suitably undertake adequate financial planning and requirements and accordingly deposit the funds in the most appropriate and best NRI account.

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