What is an NRE Account?
A Non-Residential Rupee External (NRE) account is mandatory for Indian citizens residing abroad who want to save their foreign earnings in Indian currency. NRIs must open such an account where their earnings in foreign currency are converted and saved in Indian currency (INR). It is important to note that earnings made within India cannot be deposited in such an account.
Essentially, NRE accounts allow non-resident Indians to save or invest their foreign earnings domestically in INR. NRIs can simply save their earnings in this account or invest them in term deposits and even choose a power of attorney in case they have a family dependent on them at home.
Advantages of NRE Account
It is vital to note the different features of such an account which, in turn, reflect its utility to potential NRI account holders. A best NRE account is associated with the following benefits:
- Full repatriability – Individuals earning in foreign currency can remit the same in NRE accounts in Indian Rupee. This benefit allows NRIs to deposit funds into respective accounts without undergoing the hassles of currency conversion.
Such benefits help NRIs take care of the monetary requirements of dependent family members residing in India.
- Multiple Account holding benefits – No restrictions regarding the number of NRE accounts is imposed on NRIs. Hence, individuals can maintain multiple such accounts with various banks to earn higher interests on deposits, or to ensure substantial remittance to meet all expenses originating domestically.
- Convenient maintenance – Non resident individuals can appoint an Indian resident as power of attorney holder, who can operate the account, thereby facilitating withdrawal of funds within the domestic territory. Also, individuals having power of attorney are eligible to take any required actions regarding smooth operation of the account, barring account opening and closure.
- Investment – Having an NRE account facilitates capital market transactions such as purchase and sale of shares through transfer of funds to and from an NRE account.
- Tax benefits – NRE account enjoys substantial tax exemptions on both principal and interest component of such investment. While the principal portion enjoys rebate due to Double taxation Agreement, tax waivers on interest accrued aims to boost the foreign exchange reserves of the country by enticing NRIs to maintain such accounts domestically.
Limitations of NRE Accounts
The crucial limitation of these accounts is that they cannot be used to deposit the money earned by an NRI inside the country. While there are numerous NRE account benefits, NRIs have to opt for an NRO account to save their earnings made in India.
Another limitation of such accounts is they cannot be used to save money in foreign currency either, as funds deposited in NRE accounts are converted to INR from any respective oreign currency. Any NRI who wants to retain a portion of his/her earnings in foreign currency must opt for an FCNR (foreign currency non-resident) account.
Eligibility and Documents Required
The eligibility criteria for opening an NRE account are explained in the table below.
|1.||Residential status||NRI, PIO, and OCI|
|2.||Currency of deposition||Foreign currency|
|3.||Currency of saving||INR|
|4.||Power of attorney||Only a residential Indian|
The documents which must be produced by eligible NRIs are listed below.
- Filled-in application form.
- Copy of passport of the NRI.
- Residence permit or visa of the country where the NRI is residing.
- Salary slips from an employee organisation.
- 2/3 copies of recent passport-sized photographs, depending on the financial institution.
- Money remittance related documents.
Arranging the documents required for NRE account beforehand can especially help NRIs with fast application followed by prompt activation of their account.
Rates of Interest
Under the option of NRE, there are 3 types of accounts which an NRI can opt for- savings, current, or fixed deposits. All these accounts have their specific rates of interest, predetermined at the discretion of various financial institutions.
While the interest on NRE account varies across its different types, typically FD offers the highest rate of interest. Savings accounts generally provide a healthy rate of interest, though not as high as that of FD accounts. Savings accounts primarily operate to facilitate withdrawal of remitted funds domestically by family members or power of attorney holders. Current account, on the other hand, is beneficial if individuals have an operational business in India.
Every NRI about to open an account should check and compare the different rates offered by financial institutions before finalising on their savings or investment scheme.
An NRE account facilitates the foreign currency reserve of India, which leads to an appreciation of the domestic currency. As a result, the relative demand of INR rises corresponding to standard benchmark currencies. As a result, Indian government norms exclude every NRE account from any tax liability.
Under DTAA (Double Tax Avoidance Agreement), it is considered that income tax on the amount of money put into such an account has already been deducted in the country where it has been earned. Additionally, the interest earned on this money is also exempted from any tax. This is done by the government to promote the deposition of foreign currency and increase the reserve of RBI.
However, as per the Union Budget 2020 proposal, non-taxability would be applicable only if the individual remains an NRI in perpetuity. Plus, income tax will be levied on the global income of individuals by the virtue of their residence or domicile, if they did not bear tax liability in any other country.
Also, one’s requirement of stay in India has been reduced from 182 days to 120 days in a year to maintain perpetuity of residential status as an NRI.
Difference between NRE and Other Types of Accounts for NRIs
The difference between NRE and different types of accounts are explained below comprehensively.
|S.No.||Points of Difference||NRE||NRO||FCNR|
|1.||Repatriation||Unlimited||Up to 1 million USD or equivalent||Unlimited|
|2.||Tax liability||Both principal and interest are non-taxable.||Both principal and interest are taxable.||Both principal and interest are non-taxable.|
|3.||Fund transfer||Can transfer to NRE, NRO, and FCNR account||Can transfer to NRO but not to NRE account||Cannot transfer to NRO account, but can transfer to its NRE account.|
|4.||Type of deposit||Current, savings, fixed and recurring||Current, savings, fixed and recurring||Term deposits|
There have been instances in the past where fraud and other illegal activities were reported to be linked with sudden cash influx in an NRE account.
This has prompted the government of India and Enforcement Directorate of India (ED) to take irregularities in such accounts very seriously. Consequently, NRIs should follow the pointers mentioned below to avoid any hassle.
- Change in residential status should be updated immediately.
- Investments and transactions should be tracked regularly. This includes both in India as well as abroad.
- Sale proceeds of movable and immovable assets must be noted carefully.
- Different reporting regulations and guidelines should be followed strictly.
Keeping the above pointers in mind while availing the NRE account benefits and conducting transactions, can ensure the smooth operation of these accounts.
Any deposits made in any of the several types of NRE accounts allow an NRI to remit a portion of their total earnings sans any tax liability. Additionally, interest on NRE accounts is also exempt from any income tax calculations.
NRIs should go for FD accounts if they are sure that they do not need to access their money before its maturity. In case they have dependent individuals in the country, it is best to choose a savings account as there are no limitations imposed on domestic withdrawal.
The numerous provisions which are related to financial accounts and investments are crucial to note before going on to opening an account or depositing any money. NRIs should make it a point to check the numerous interest rate offers that are available, while also choosing the right kind of account for themselves.