At the beginning of the NRI Status, most of the people are in dilemma about what kind of Bank account should they hold in India? Should it be an NRO account or NRE account or a FCNR account? Each of these accounts has their own pros and cons. Understanding them in detail will help you in making better choice.
First let us define who is an NRI:
- An NRI is a person resident outside India who:
- Is a citizen of India (or)
- Is a citizen of any other country other than Bangladesh or Pakistan if
- He at any time held Indian passport
- He or either his parents or any of his grandparents were citizen of India by virtue of the constitution of India or the Citizenship Act, 1955 (57 of 1955),or,
- A person is a spouse of an Indian citizen or a person referred to in a sub-clause above.
NON RESIDENT EXTERNAL ACCOUNT (NRE):
An NRE account is a rupee denominated account. That is, funds in an NRE account are maintained in Indian rupees. It can be a savings, current or a fixed/ term deposit account. The minimum maturity for these kind of accounts is one year.
Non-resident External Rupee account (NRE Account) can be opened only by the NRI himself and not through the holder of the power of attorney.
ADVANTAGES OF NRE ACCOUNTS:
- The interest earned on deposits in an NRE account is exempt from tax in the hands of the NRI.
- Funds can be repatriated from an NRE account. This means that the funds can be freely sent to any other country.
- An NRE account can contain funds remitted from abroad, or obtained from another NRE/FCNR account maintained in India.
- Funds can be transferred from an NRE account to an NRO account without any restriction.
- The NRE account can be held jointly, provided the other person is also an NRI.
- Nominations are allowed for NRE accounts.
DISADVANTAGES OF NRE ACCOUNTS:
- Interest earned on Deposits in an NRE account is very less comparatively to NRO account.
- Balances in the NRE accounts are held in Indian Rupees and thus exposed to Exchange Fluctuation risk.
NON RESIDENT ORDINARY ACCOUNT (NRO):
NRO accounts are also rupee denominated accounts. This means that the foreign currency is converted to Indian rupees at the prevailing foreign exchange rates when the money is deposited into the account.
ADVANTAGES OF NRO ACCOUNTS:
- Interest earned on Deposits in NRO account is very high comparatively to NRE account.
- An NRO account can be held jointly with another NRI or with a resident Indian.
- Nomination is allowed for NRO accounts.
DISADVANTAGES OF NRO ACCOUNTS:
- Funds cannot be repatriated from an NRO account. These funds have to be used only for local (within India) payments in Indian Rupees.
- An NRO account can only contain funds received from within India.
- Funds cannot be transferred from an NRO account to an NRE account.
- The interest earned on deposits in an NRO account is taxable in the hands of the NRI as per the applicable income tax slab rates.
FOREIGN CURRENCY NON RESIDENT ACCOUNT (FCNR):
- FCNR accounts are denominated in foreign currency. The source of funds deposited into FCNR accounts have to be from sources abroad. They can also be from your other NRE or FCNR accounts.
ADVANTAGES OF FCNR ACCOUNTS:
- The principal amount and the interest are fully repatriable.
- Interest income earned on the money in a FCNR account is non-taxable in India. However, it may be taxable in your country of residence as per that countries tax rules.
- You can have other NRI’s as joint account holders on FCNR accounts.
- FCNR accounts do not carry any forex rate risk as the accounts are always maintained in the foreign currency.
DISADVANTAGES OF FCNR ACCOUNTS:
- Interest Rate on deposits in FCNR accounts are less comparatively to NRO accounts.
- Resident Indians cannot be joint account holders in FCNR accounts with NRI’s.
- Savings account option is not available for FCNR accounts. Only term deposits should be opened in FCNR accounts.
- The terms should not be less than 1 year and not exceeding 3 years.