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One of the major challenges that Non-Resident Indians (NRIs) earning money in India or abroad face is managing their finances. Apart from finding it difficult to track bank accounts in other countries, an NRI also faces the challenge of repatriating money to their home account. The issue is made even more difficult by the fact that NRIs are not allowed to open of manage saving accounts in India. To manage their finances more effectively, NRIs are required to convert their saving accounts in India to Non-Resident Accounts. This can either be a Non-Resident Rupee (NRE) or Non-Resident Ordinary Rupee (NRO) account.
Why Convert to NRE or NRO Accounts
Under the Foreign Exchange Management Act (FEMA) guidelines, NRIs are prohibited from having saving accounts in their name in India. In fact, all NRIs, including Overseas Indian citizens are required to conduct their banking transitions only through a Non-Resident Account. The Act requires NRIs to convert all their present savings or the money earned abroad to either an NRE or NRO. Continuing to use a saving account in India is contravention to the FEM (Deposits) Regulations 2016 can possibly lead to penalties and other legal complications. Converting to an NRE or NRO allows one to send money earned abroad to India at any time and retain the income they have earned in India as well, in addition, NRIs can get tax advantages for their investments made in India through this NRI accounts.
What are the Differences Between NRE and NRO Accounts?
NRE and NRO accounts are the two options with which NRIs can maintain a Rupee account in India. An NRE account allow only foreign deposits, which are converted to Indian Rupee at the time of deposit. The account gives you complete security, and can be opened in the form of current, saving, fixed or recurring deposits. The main benefit of this account is that the interest earned NOT taxable and comes with an international debit card for withdrawing and transacting money at any time (with most of the banks). A major disadvantage is that money deposited in the account should only be from a foreign source. For money earned locally, it needs be certified (by a Chartered Accountant) as repatriable to a foreign country.
An NRO account, on the other hand, is a current or savings account that allow NRIs to manage the income they have earned in India AND foreign as well. The money deposited into this account is automatically converted from foreign currency into Indian Rupee. The major difference from the NRE is that the interest earned in this account is taxed at source (if this is less than the taxable limit, the excess tax paid can be claimed as refund). However, it (NRO) does not allow sending of money to a foreign country.
To conclude, the law does not allow NRIs to hold saving accounts in India. Therefore, one should either close it or convert to a Non-Resident Account, either an NRE or NRO as soon as his / her status changed to a Non-Resident.
Note: Non-Resident definition – Any individual will be treated as non-resident if he / she did NOT stay in India for a period / periods of 182 days or more in the previous year (Apr – Mar)
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