Interest in NRO account is taxable, but tax-free in NRE account

All Indian citizens who are non-resident under FEMA and non Indian citizens of Indian Origin (PIO) are called as non-resident Indians (NRI). All NRIs can have three types of bank accounts in India, namely Non-resident Ordinary (NRO) account, Non-resident External (NRE) account and Foreign Currency Non Resident (FCNR) account. Let us see the differences between NRO and NRE accounts.

NRO account

An Indian citizen can open an NRO account any time after becoming an NRI or he can get his existing bank accounts designated as NRO account. A foreign citizen who is not a person of Indian origin can also open an NRO account during his stay in India. However, citizens of Pakistan and Bangladesh need prior permission of the Reserve Bank of India to open an NRO account.

You can have the NRO account as a single account or a joint account with either a resident or a non resident. NRO accounts can be saving, current, recurring or a fixed deposit account and are denominated in Indian rupees. These accounts can be operated by the account holder/s or a resident power of attorney holder.

You can remit money from abroad to your NRO account through banking channels. You are also allowed to deposit foreign currency up to $5,000, duly supported by currency declaration form, while you are in India. Income earned in India, such as rent, dividend, pension, sale proceeds of Indian asset, gift or loans taken from your relatives in Indian currency, can be credited in to the NRO account.

You can transfer up to $ 1 million abroad every year from your NRO account after payment of local income taxes, if any. The balance in the account can be used for payment of rent, taxes and for making investments on non-repatriation basis in India. On your return to India, once you become a resident for FEMA purposes, you need to inform the bank immediately to re-designate the account as ordinary account.

NRE account

NRE accounts can only be opened by the NRI personally. So it cannot be opened by someone holding a power of attorney on behalf of the NRI. One can maintain more than one NRE account in India. NRE accounts are also denominated in Indian currency. An NRE account can also be opened singly and jointly, but only with other non-resident. A Pakistani or Bangladeshi citizen cannot open an NRE account. Like NRO account, NRE account can also be in the form of savings, current, recurring or fixed deposits.

Any amount remitted from outside India, in any permitted currency, can be freely credited in your NRE account. Likewise, proceeds of cheques drawn on your foreign currency account, draft or traveller cheques issued outside India and sale proceeds of investments made on repatriation basis can also be credited to the NRE account. Likewise any foreign currency which is declared in foreign currency declaration form on visit to India can also be deposited in the NRE account.

NRE account, though maintained with banks in India, is like a bank account maintained outside India. Amounts from it can be freely transferred to another NRE account or remitted outside India without any limit or permission. Due to this RBI permits only limited credits in the NRE account.

You can also use balance in your NRE account to make investments whether on repatriation basis or otherwise or for home loan EMI payment. You are also allowed to get a loan against balance in these accounts in India, as well as outside India.

The balance in NRE account can be freely transferred to your NRO account. But for transferring money from your NRO account to NRE account, you need to follow the prescribed procedure. Once money is transferred from NRE account to NRO account, it loses its free transferability character. So think twice before you transfer your money from NRE account to NRO account.

Taxation of interest in India

Interest earned on all NRO accounts is fully taxable in India. Banks will deduct tax at source, while crediting any amount to your NRO account. This applies to interest on saving bank accounts too, which is not subject TDS in case of resident taxpayers.

The interest earned on NRE account is fully tax-free in your hand as long as your are a non-resident. But it will become fully taxable from the date of your arrival in India for good, unless you have obtained permission from RBI to continue the accounts.

NRE V/S NRO

• Both NRE and NRO accounts can be opened in the form of  savings, current and fixed deposit 
   
• NRE  accounts can be opened by the NRI or a resident power of attorney  holder, but NRO account can be opened only NRIs, whether singly or jointly

The writer is a tax and investment expert