Confused when to use NRE & NRO Account? Here is a brief for you.
An NRI (Non-Resident Indian) with earnings in both foreign countries and India often faces challenges in managing finances across different currencies and bank accounts. Managing finances across India and abroad can be challenging, particularly when dealing with income and savings in multiple currencies. To simplify this, NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts offer solutions to these issues, providing NRIs with a streamlined way to manage their income and savings in India. This article delves into the key features, benefits, and differences between these accounts, guiding you in choosing the one that best aligns with your financial needs.
NRE ACCOUNT
(Non-Resident External Account)
Overview:
An NRE Account is designed for NRIs who wish to deposit their foreign income and savings in Indian Rupees (INR). You can open it individually or jointly (with another NRI). The account accepts only foreign currency credits, which are converted into INR at the time of deposit.
An NRE Account is designed for NRIs who wish to deposit their foreign income and savings in Indian Rupees (INR). You can open it individually or jointly (with another NRI). The account accepts only foreign currency credits, which are converted into INR at the time of deposit.
Types of NRE Accounts:
- Savings
- Current
- Recurring
- Fixed Deposit
Key Features:
- Foreign Currency: You can deposit funds in foreign currencies (e.g., USD) and with-draw in Indian Rupees (INR).
- Currency Conversion: Funds are converted into INR upon deposit, making it subject to exchange rate fluctuations upon repatriation.
- Repatriation: Both principal and interest can be repatriated to your foreign bank account without restrictions.
- Tax Exemption: Both the principal and interest earned are tax-exempt in India. • Usage: Primarily used for investment purposes in India or for personal use.
Benefits:
- Tax-Free: No tax on interest or principal in India.
- Repatriation Flexibility: Funds can be freely transferred abroad.
- Multiple Types: Choose from various account types based on your needs.
NRO ACCOUNT
(Non-Resident Ordinary Account)
Overview:
An NRO Account is for NRIs and Persons of Indian Origin (PIOs) to manage income earned in India, such as rent, dividends, pensions, or proceeds from property sales. It is Rupee-denominated, and deposits are accepted in Indian Rupees.
An NRO Account is for NRIs and Persons of Indian Origin (PIOs) to manage income earned in India, such as rent, dividends, pensions, or proceeds from property sales. It is Rupee-denominated, and deposits are accepted in Indian Rupees.
Types of NRO Accounts:
- Savings
- Current
- Fixed Deposit
Key Features:
- Income Source: You can deposit earnings from within India (rent, dividends, pensions) as well as foreign income (in foreign currency), which is then converted to INR.
- Currency Conversion: Foreign income is converted into INR at the prevailing exchange rates.
- Repatriation: Repatriation of funds is restricted, with a limit of USD 1 million per financial year.
- Mandates: You can appoint a resident Indian as a power of attorney for managing your NRO account.
Benefits:
- Manage Indian Income: Perfect for managing income earned in India (e.g., rent, dividends).
- Repatriation limit: NRIs can repatriate up to USD 1 million per year, subject to certain conditions.
- Joint Accounts: Can be opened with a resident Indian on a "former or survivor" basis.
NRE & NRO ACCOUNTS
Key Differences Between
Overview:
An NRO Account is for NRIs and Persons of Indian Origin (PIOs) to manage income earned in India, such as rent, dividends, pensions, or proceeds from property sales. It is Rupee-denominated, and deposits are accepted in Indian Rupees.
An NRO Account is for NRIs and Persons of Indian Origin (PIOs) to manage income earned in India, such as rent, dividends, pensions, or proceeds from property sales. It is Rupee-denominated, and deposits are accepted in Indian Rupees.
Conclusion:
In conclusion, both NRE and NRO accounts cater to the unique financial needs of NRIs, each with distinct features and benefits. The NRE account is ideal for managing foreign income, offering tax-free benefits and full repatriation of funds without restrictions, making it a great option for those looking to invest in India or transfer funds freely abroad. On the other hand, the NRO account is designed to manage income earned within India, such as rent, dividends, and pensions, with certain repatriation limits and tax obligations on interest earnings.
Actionable insights
On your visits to India use funds from NRO account for all your expenses as in that case you would consume the funds which might attract repatriation restrictions and funds in NRE account can be preferred to invest in India.
INDIAN INCOME TAX RULES
What NRIs need to know about
Income earned or accrued in India is taxable for NRIs. Unlike resident Indians, whose taxes are based on global income, NRIs are only liable to pay taxes on income generated within India.
NRIs can improve financial results in India by knowing the tax implications of various investments and taking strategic approaches.
Navigating financial planning as a Non-Resident Indian (NRI) involves understanding various tax implications and leveraging available exemptions to optimize returns. Investment options are plenty for NRIs in India, but effective financial management boils down to choosing tax-efficient strategies.
NRIs can improve financial results in India by knowing the tax implications of various investments and taking strategic approaches.
Navigating financial planning as a Non-Resident Indian (NRI) involves understanding various tax implications and leveraging available exemptions to optimize returns. Investment options are plenty for NRIs in India, but effective financial management boils down to choosing tax-efficient strategies.
Taxable income for NRIs in India
Income earned or accrued in India is taxable for NRIs. Unlike resident Indians, whose taxes are based on global income, NRIs are only liable to pay taxes on income generated within India. Understanding this distinction helps NRIs structure their investments more effectively.
Further, NRIs have to ascertain their residential status under the Income Tax Act for a particular financial year. The number of days spent in India determines this status, which in turn determines tax liability. NRIs must be aware of the changes in these rules.
Further, NRIs have to ascertain their residential status under the Income Tax Act for a particular financial year. The number of days spent in India determines this status, which in turn determines tax liability. NRIs must be aware of the changes in these rules.
Actionable insights
On your visits to India use funds from NRO account for all your expenses as in that case you would consume the funds which might attract repatriation restrictions and funds in NRE account can be preferred to invest in India.
NRE & NRO accounts:
BANK ACCOUNTS & FIXED DEPOSITS
NRIs can opt for Non-Resident External (NRE) or/and Non-Resident Ordinary (NRO) accounts.
- NRE accounts: These account types are entirely repatriable, and they allow for all interest earned fully tax-free back in India, making them thoroughly tax-efficient means of parking one's foreign income.
- NRO accounts: Intended to manage the income generated in India, be it rent, pension, or any other form of income. The interest income from NRO accounts attracts 30 percent tax deducted at source (TDS) along with surcharges and cess, although if the income is below Rs 2.5 lakh in a financial year (in old scheme) and 3 lakh in a financial year (in new scheme), NRIs can file their return and get back the TDS.
Fixed deposits:
- NRE and FCNR deposits: The interest on these deposits is tax-free, making it an attractive investment avenue as it is tax-effective.
- NRO fixed deposits: The interest is taxable at 30 percent as in NRO accounts. The other aspect that NRIs should be cautious about is the currency risk that comes with NRE and FCNR deposits as the returns are directly related to the currency fluctuation. This can be avoided with proper planning.
Mutual funds:
For NRIs, investment in mutual funds in India attracts the same taxation rules as applied to resident Indians:
- Equity-oriented funds: Long-term capital gains (LTCG) above Rs 1.25 lakh and held for more than one year are taxed at 12.5 percent. STCG attracts a tax rate of 20 percent.
- Debt-oriented funds: The gains are added to the income and taxed accordingly irrespective of the holding period.
- NRIs can consider opting for Systematic Investment Plans (SIPs) in mutual funds to invest regularly and reduce the impact of market volatility.
REAL ESTATE
Real estate is a popular investment avenue for NRIs, but it comes with specific tax implications
Rental income:
Fully taxable as per income tax slab rates. Proper documentation of municipal taxes and home loan interest can reduce taxable income.
Capital gains:
- Short-term capital gains, where the property is held for less than two years, are taxed as per slab rates.
- As per Union Budget 2024, long-term capital gains, where the property is held for more than two years, are taxed at 12.5 percent without indexation benefits. NRIs can claim exemptions under Section 54 by reinvesting in residential property or investing in Section 54EC bonds. To further optimize tax efficiency, NRIs should consider the advantages of joint ownership with resident family members, as this can better distribute tax liabilities.
BONDS
Bonds are a stable and tax-efficient investment for NRIs:
- Government and PSU bonds: Investments through NRE accounts earn tax-free interest.
- Capital gain bonds: Under Section 54EC, NRIs can invest up to Rs 50 lakh in bonds issued by NHAI, REC, etc. The income from these bonds is tax-free and locked for 5 years with a yield of about 5.25 percent per annum. Besides, NRIs can also look into sovereign gold bonds (SGBs), which bring capital appreciation with periodic interest, besides being tax-free at redemption.
- Double Taxation Avoidance Agreement: The provisions under the respective DTAA will be beneficial to avoid taxing the same income in India and in the resident country.
- Tax-free instruments: One should concentrate on NRE accounts and FCNR deposits that offer tax-free returns.
- Investment planning: It would be tax-efficient if investments were done according to financial goals.
- Professional advice: Tax and financial advisors can help in keeping up with the changing tax laws and even optimize investment portfolios.
Conclusion
NRIs can improve financial results in India by knowing the tax implications of various investments and taking strategic approaches. Tax-effective options in NRE accounts, FCNR deposits, and long-term equity investments help to maximize the returns with the least possible liability. With exemptions like Section 54 and provisions of DTAA, one can ensure compliance and also be cost-effective. One should also keep oneself abreast with the changes in the tax laws and seek the help of financial advisors to achieve one's goals in India.