A Comprehensive Guide on NRE Accounts for NRIs

For Non-Resident Indians (NRIs), managing their finances across international borders can be challenging. Two primary account options are NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts. Understanding the distinct features of each account will ensure improved financial decisions to optimise your savings and investments.

This comprehensive guide delves into NRE accounts, explaining their purpose, key features, eligibility criteria, and the advantages they offer NRIs.

What are NRE Accounts?

NRE accounts are bank accounts designed explicitly for NRIs to manage foreign earnings in Indian rupees. They provide a secure and convenient way to deposit, hold, and manage income earned outside India. These accounts can be maintained as savings, current, recurring and fixed deposit accounts.

Key Features of NRE Accounts:

• Full Repatriation: The primary benefit of NRE accounts is unhindered repatriation. Unlike NRO accounts, funds held in NRE accounts, including the principal amount and interest earned, can be freely transferred outside India without restrictions. This offers NRIs complete control over their finances and the flexibility to move their money as needed.
• Tax-Exempt Interest: Another advantage of NRE accounts is the tax exemption on interest income. The interest earned on deposits in these accounts is not subject to Indian income tax. This allows NRIs to maximise their returns on foreign earnings deposited in India.

Joint Account Option:

NRE accounts have the provision for joint ownership with another NRI on a “former or survivor” basis. This feature allows NRIs to manage their finances collaboratively with a trusted family member or friend who is also an NRI.

Eligibility for NRE Accounts:

Opening an NRE account is a straightforward process for NRIs or Persons of Indian Origin (PIOs) who meet the following criteria:

• Possess a valid passport
• Hold a valid visa/work permit for the country of residence (if applicable)
• Qualify per the eligibility criteria outlined in the Foreign Exchange Management Act (FEMA).

Benefits of NRE Accounts over NRO Accounts:

While both NRE and NRO accounts cater to NRIs, NRE accounts offer distinct advantages:

• Unrestricted Repatriation: Unlike NRO accounts with limited repatriation options, NRE accounts allow complete freedom to move funds outside India.
• Tax-Exempt Interest: Interest earned on NRE accounts is tax-free in India, whereas NRO account interest is subject to TDS (Tax Deducted at Source).
• Flexibility in Deposits: NRIs can directly deposit their foreign earnings into NRE accounts, unlike NRO accounts with limitations on foreign currency deposits. After the initial deposit, the bank will convert the foreign currency to INR based on its internal policies and prevailing exchange rates. This conversion typically happens when transactions are made from the account (withdrawals, transfers, etc.).

Fees Associated with NRE Accounts:

While NRE accounts offer significant benefits, it’s essential to be aware of their potential fees. These fees can vary depending on the bank you choose and the specific features of your account. Here are the standard charges:

• Account Opening Fee
• Minimum Balance Requirement
• Transaction Charges
• Currency Conversion Fees
• Annual Maintenance Charges

Permissible debits and credits for an NRE account:

The permissible debits for an NRE account include local disbursements, remittances outside India, transfers to other NRE accounts, and investments in India. Conversely, allowable credits for an NRE account include funds transferred from abroad, interest accrued on deposits within the NRE account, returns on investments made via the NRE Account, transfers from other NRE/FCNR(B) accounts, proceeds from investments initiated from this account or via inward remittance, and transferring funds from an NRO to an NRE account.

Understanding NRE Interest Rates:

NRE accounts offer tax-free interest on your deposits. The interest rate can vary depending on the bank, the type of NRE account (savings, fixed deposit, etc.), and the deposit tenure. It’s advisable to compare rates different banks offer before opening an account to maximise your returns.

Loans against deposits:

Loans are available to account holders and third-party Resident Indians in India against the security of funds held in NRE accounts. Loans extended to account holders within India can be utilised for various purposes such as business ventures, investment in stocks and securities, acquiring residential property for personal use, and other personal expenses, with a capped limit of INR 10 million. Similarly, loans extended to third parties within India can serve personal or business needs, also capped at INR 10 million. Loans in India to third parties can be used for personal or business purposes, subject to a maximum of INR 10 million. Loans overseas can be used for any bonafide purpose, subject to specified limits and conditions.

What needs to be done once an NRI returns to India permanently:

• When an NRI returns to India permanently, they need to convert their NRE account to a Resident account or close it and open a new one. This is because NRE accounts are meant for non-residents and have tax benefits for non-residents. Once the individual becomes a resident, they are no longer eligible for these benefits and must switch to a Resident account.
• Suppose the NRI has investments made through their NRE account. In that case, they need to inform their bank, fund house, and associated insurance company about the change in residential status. Once they become a resident, the regular tax laws for ‘Resident Indians’ will apply.
• Any interest earned will be taxable if the NRI has an NRE account and returns to India. However, upon return, they can transfer their funds from the NRE account to the RFC (Resident Foreign Currency) account to avoid income tax exposure.
• Suppose the NRI has an option or plans to go back abroad after a certain point in time. In that case, they can plan to convert the existing NRE Account to a Resident Foreign Currency (RFC) Account to avoid income tax exposure.
• Suppose the NRI fails to convert their NRE account within three months of their return. In that case, it will be considered a violation of the Foreign Exchange Management Act (FEMA) and can attract a penalty.
• The NRI also need to inform their bank, fund house, and associated insurance company about the change in residential status for their investments made through their NRE account.

A few points to note about NRE accounts:

• Transfers to NRE/FCNR accounts of the account holder or any other NRI are permitted.
• Gifts to residents/NRI are also allowed, but Power of Attorney (POA) cannot make a gift on behalf of an NRI.
• An attorney has the authority to manage an account but is restricted from initiating its opening, issuing gifts, transferring funds to another NRE account, or remitting abroad. However, they can withdraw for local payments or transfer funds to NRO accounts.
• Nomination is permissible in NRE accounts.
• The account can be renewed and transferred to the holder’s other NRE/FCNR account.
• Transfer to another NRI’s NRE/FCNR account is also permitted.
• The account is also transferable from one bank to another within India.
• Premature withdrawal is permissible, but for a period of fewer than 12 months, no interest is payable. Premature withdrawal is allowed after 12 months, subject to a specified penalty.
• Interest accrued on an NRE fixed deposit is exempt from taxation, and the balance in the account is not liable for wealth tax.
• NRE accounts are not subject to gift tax provisions in India. However, starting April 1, 2006, any amount received exceeding Rs. 50,000 as gifts from individuals other than specified relatives is considered part of the recipient’s total income.

NRE vs. NRO Accounts: Choosing the Right Account

The choice between NRE and NRO accounts boils down to the source and nature of your income and repatriation needs. While NRE accounts are ideal for managing income earned outside India, NRO accounts are suitable for managing income earned within India. Recognising your financial objectives and needs is crucial for making informed decisions.

In summary, NRE accounts provide NRIs with a convenient and tax-efficient avenue to oversee their overseas earnings in India. By grasping the essential features, eligibility criteria, and advantages of NRE accounts, NRIs can strategically plan their finances and work towards their objectives.

If you have any queries on NRE accounts or want more information on them, their policy and their benefit to you, consult a financial advisor specialising in NRI services.

We would like to hear more about your experience with NRE accounts. Reach out to us at [email protected]