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If you or your immediate family members are going abroad for studies, employment, etc and will be non-residents for tax purposes, then you will have to open a bank account — Non-Resident External (NRE) / Non-Resident Ordinary (NRO) account—for transacting in India. Let’s see what these accounts are.

Apart from certain other conditions, the main condition for opening a NRE / NRO account is that the person must be a Non-Resident Indian (NRI). The residential status of a person is to be determined for every financial year separately.

It may so happen that in one year the individual would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same.

For instance, let us consider the case of Ramani and Karnani. Both are NRIs and hold NRE savings account. In June 2021 both came to India. Ramani came to India for a short visit, while Karnani has returned to India for the good.

When NRIs come to India for a short visit, they can continue the account as NRE savings account. However, if NRIs come back to India for good, they are not allowed to maintain the NRE savings account. They will have to convert this account to a resident rupee account. Hence, Ramani can continue with his NRE account, whereas Karnani has to convert his NRE account to resident rupee account. In case he wants to hold the money in foreign currency, he can convert it to Resident Foreign Currency (RFC) Account.

An NRE / NRO account is used by NRIs to deposit their foreign earnings to be used for transacting in India. NRE / NRO account may be in form of savings account, current account or deposits. NRIs may use NRE / NRO accounts for making investments in India such as mutual funds.

Let us take another example, of Navin and Melwin. Navin holds an NRE account and Melwin holds an NRO account. Navin and Melwin both want to deposit their incomes earned in India in their respective NRE / NRO account. Melwin can do this but Navin can’t do this. The deposits made into NRE accounts should be earnings outside India. NRIs cannot deposit their income generated in India in NRE accounts. However, it is possible for an individual to hold both NRE and NRO accounts. Hence, Navin should open an NRO account for depositing his income generated in India.

Now, lets assume that the interest for the FY 20-21 is 6 lakh for both Navin and Melwin. Interest earned in NRE account is tax free in India. Hence, Navin will have no tax liability in India. Whereas, interest earned in NRO account is taxable in India and subject to TDS (tax deducted at source). Hence, the interest earned by Melwin will be subject to income tax in India.

Now, lets assume that the balance in Navin’s NRE account and Melwin’s NRO account is 1 crore (including interest). Now, both Navin and Melwin want to repatriate this fund back to their country of residence.

Funds in NRE accounts are freely repatriable to the country of residence of the NRI. Whereas for NRO accounts, interest amount is freely repatriable and principal funds in NRO accounts can be transferred up to the RBI limit for such repatriation i.e. $1 million per annum. However, the funds transferred from NRO account are subject to repatriation charges and certain RBI regulations, including filing of certain forms.

Suppose, Mitali, a person of Indian origin who moved to the UK five years ago, wants to transfer funds to India for her family’s welfare. Then, for ease of operation, she wants to open joint account in India with her mother who is a resident in India. Which account should she open? According to the Foreign Exchange Management Act (FEMA) guidelines, a NRI cannot have a bank savings account in India. Hence, Mitali needs to open a NRE / NRO account to transact in India. Also, a NRE joint account can be opened by two NRIs only. Since, she wants her mother, who is an Indian resident, to be joint account holder, Mitali will have to open an NRO account.

CA Nitesh Buddhadev is founder of Nimit Consultancy.

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