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What is an NRO account?

A non-resident Indian having a stipulated source of income domestically from any source is required to open an NRO account to deposit the same. Any individual residing for more than 120 days in any abroad location with less than 365 days’ stay in 4 previous years in India is declared to be an NRI as per the Union Budget 2020’s proposal. He/she thus has to open an NRO account for any banking requirements arising within the geographical territories of India.

There are many types of accounts offered under non-residential rupee ordinary category. It includes options like current, savings, recurring, fixed deposits, etc. Before going into the detail of different types of accounts for earnings within the country, it is important to understand the basic characteristics of these accounts.

NRO Account Benefits

Understanding the features offered by these accounts also ensure an NRI can understand the NRO account benefits. These are discussed below in detail.

  • Safeguarding earnings – 

Non-resident individuals can have domestic earning sources such as property let out rent, dividend income from stock market investments, etc. Such funds can only be deposited to financial institutions through an NRO account, thereby ensuring safekeeping of total earnings accrued domestically.

  • Increased credit availability – 

An NRI can opt for loans against NRO fixed deposit to meet any emergency expenses arising either in India or in the respective country of residence. Since these lines of credit are provided against collateral (e.g. NRO FD), the rate of interest is also considerably lower than those of unsecured loans.

  • Multiple account holders – 

Two or more individuals can jointly open an NRO account. While at least one individual has to be an NRI/PIO/OCI, the other account holder can also be Indian. Additionally, if both the applicants for this joint account reside abroad, they can also choose an individual living in the country to have the “power of attorney” for operating such an account domestically.

  • Ease of investment –

These accounts can be easily used by NRIs to invest in term deposits which have safe and assured returns. These include fixed and recurring deposit investments. NRIs should also note that fixed deposit accounts are covered up to a sum of Rs.1 lakh by the government of India in case the financial institution fails or defaults, thereby ensuring high returns through investment in NRO accounts.

Limitations of NRO accounts

Despite the numerous NRO account benefits, they also have a few limitations. These are discussed below too.

  • These accounts cannot be used to save the money earned abroad. This makes it imperative for NRIs to also avail an NRE account which can be used for such purposes. Additionally, an NRO account cannot be used to hold foreign exchange. Since they are used to deposit the earnings inside India, these accounts can only hold INR.
  • These accounts are subject to tax liabilities. The principal earned as well as the interest, both are subject to tax deductions at a flat rate of 30%. NRIs can, however, avail an exemption on the tax on their interest under section 80TTA of Income Tax Act.

Eligibility and Documents Required

The table below explains all the eligibility criteria that are crucial for such an account.

ConditionsEligible/Applicable criteria
1.Residential statusNRI, PIO, and OCI
2.Transaction currencyINR
3.Joint accountJoint applicant can be NRI or residential Indian
4.Power of attorneyResidential Indian

The documents required for NRO account are also listed below.

  • Fully filled-in application form.
  • A copy of the passport of the NRI.
  • Visa or residence permit of the applicant.
  • Depending on the financial institution, 2/3 copies of passport-sized photograph of the applicant.
  • Money remittance details of the applicant.

NRIs should begin by checking the eligibility criteria and then arrange the necessary documents when they have decided to apply for an NRO account, to make the application process hassle free.

Rates of interest

Typically, financial institutions offer quite a few types of savings and investment options under this type of account. It includes savings or current accounts, as well as term deposits like FD, and even recurring deposit accounts.

While recurring deposit accounts offer a high return, the return on fixed deposit accounts is the highest. In case dependent family members undertake frequent withdrawal of funds deposited in such accounts, a savings account is the best option. While choosing the best NRO account, investors should compare the interest offered by different financial institutions.

Taxation

An NRO account is taxed at 30% of the total income accrued in India, as per the Income Tax Act of 1961. Additionally, a cess at 3% is applicable on the overall tax liability. Interest earned through such accounts is also taxable. Nonetheless, under Section 80TTA, interest income under Rs. 10,000 waivered, while NRIs reporting a total earning higher than the stipulated interest income is taxed.

Difference between NRO and other types of accounts for NRIs

Apart from NRO, there are 2 more types of NRI accounts. This includes NRE and FCNR accounts. Difference between such accounts should be taken into account for a clear understanding of the facilities provided by various NRI accounts available in India.

S.No.Points of differenceNRONREFCNR
1.Currency transformationINR to INRForeign currency to INRForeign currency to foreign currency
2.RemittanceUp to 1 million USD or equivalentUnlimitedUnlimited
3.Tax liabilityBoth principal and interest are taxable.Both principal and interest are non-taxable.Both principal and interest are non-taxable.
4.Joint account holderCan be Indian or otherwise.Must be an NRIMust be an NRI.
5.Fund transferCan transfer to NRO but not to NRE accountCan transfer to NRE, NRO, and FCNR accountCannot transfer to NRO account, but can transfer to its NRE account.
6.Type of depositCurrent, savings, fixed and recurringCurrent, savings, fixed and recurringTerm deposits

Be it rent on real estate property or returns on investments, there are many avenues for an NRI to earn from India even while they are living abroad. It is important these individuals convert their accounts or open a new account before they move abroad. These accounts are mandated by law and not abiding by the same can lead to penalty charges and fines.

FAQ

  • Do I have to convert term deposits into NRO accounts even if I am returning before it matures?

Yes, the concerned financial institution should be informed of the change in your residential status.

  • Can the individual who has power of attorney close my account?

While an individual who has power of attorney can withdraw, deposit and perform all kinds of actions with your account, he/she cannot close the NRO account.

  • Can I avail tax benefits on the loans which can be availed against such term deposit accounts?

Yes, you can avail tax benefits on loans availed against such term deposit accounts.

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