How NRE, NRO demat accounts are taxed

I work in the merchant navy and my residential status is non-resident Indian (NRI), but I stay in India. How is a demat account with the non-resident external (NRE) account different than that in the non-resident ordinary (NRO) account? Also, what is the difference in their taxability?

—Name withheld on request

Under the exchange control law, when a person leaves India for employment, business or any other purpose, indicating the intention to stay abroad for an uncertain period, he or she may be considered as a “person resident outside India”. As a “person resident outside India”, the individual is required to designate his existing bank account to NRO account due to change in his residential status. The residential status under the exchange control law is different from that under the income-tax law.

Assuming you qualify as an NRI under the exchange control law, you are required to inform your bank to designate your resident bank accounts (savings and fixed deposits) to NRO accounts. However, in case of resident demat accounts, a new non-resident demat account (NR demat) account will be opened and securities would be transferred from the resident demat to the NR demat account. You may sell the shares from the NR demat account and transfer the sale proceeds to your NRO account in India. You may remit up to $1 million per financial year outside India from your NRO account for all bonafide purposes and subject to payment of tax.

As an NRI under the exchange control law, you may also open an NRE account (savings and fixed deposits) and an NRE demat account to invest in certain securities (such as IPOs). Funds from an NRE account are freely repatriable outside India.

There will be tax implications in India if there is income from investments held in demat account (either resident or non-resident) such as dividend income or capital gains in case of sale or transfer of shares. There is no difference in taxability of NRO demat account or NRE demat account. However, interest income from NRE accounts (savings and fixed deposits) earned by an individual is exempt from tax in India, provided the individual qualifies as a “person resident outside India” under the exchange control law.

Sonu Iyer is tax partner and people advisory services leader, EY India