NRIs (Non-Residential Indians) who earn both in India and overseas may now face complexities in managing their finances. As per new regulations, they are bound to track bank accounts in multiple countries and repatriate money to their home country. It is where NRE & NRO accounts come into play. In this blog, we have explained NRE & NRO accounts and simplified the rules.
As per FEMA (Foreign Exchange Management Act) guidelines, NRIs can not hold a savings account in India, and they must transfer all the money they earn abroad to an NRE (Non-resident external) account or NRO (Non-resident ordinary) account. If an NRI continues using a savings account in India, they might be penalised. So, NRIs can open either an NRE or NRO account at their convenience. Opening an NRE or NRO account helps NRIs in two ways- First, they can send their foreign earnings to India at any time, and second, they can keep their money earned in the home country itself. Let’s understand what an NRE account and an NRO account are.
Non-Resident External (NRE) Account
The NRE account is an Indian rupee-denominated account with an inclusive security facility. These accounts have multiple categories: current, savings, recurring, or fixed deposits. Overseas currency deposited into an NRE account converts into the Indian rupee. In addition, an NRI can transfer their money to an overseas account through an NRE account with optimum ease and convenience.
Every NRE Account holder must remember that they can deposit money earned outside India only and use international debit cards to withdraw or transact money anytime. In addition, if an NRI links their NRE account with the investment account, mutual fund investment would become effortless for them. Primarily, the NRE account is utilised for business activities, personal banking, or stock investment in India.
Non-Resident Ordinary (NRO) Account
NRO accounts are intended for NRIs to manage their earnings in India. These savings or current accounts allow the account holder to manage transactions or deposit money effortlessly. NRIs can receive money in their NRO account through Indian rupees or foreign currency. An individual can apply to open a joint NRO account with an Indian resident or non-residential Indian. Additionally, one can transfer money from an NRO account to an NRE account. The interest earned through this account is a matter of TDS (Tax Deducted at Source).
Rules & Regulation of NRE/NRO Accounts
NRE and NRO accounts have different rules and regulations based on repatriation, tax treatment, fund treatment, and other factors, as mentioned below.
Repatriation
- Repatriation is free through an NRE account for the principal and the interest amount.
- An NRO account holder is restricted from remitting more than $1 million, including taxes, in a financial year.
- NRO account holders can repatriate the interest amount freely, but there are certain limitations when repatriating the principal amount.
- Repatriation through an NRO account requires an undertaking and a certificate from a chartered accountant.
Tax Treatment
- There is no tax (Income, wealth, or gift tax) on NRE accounts in India.
- Credit balances and interest earned in NRO accounts are subject to relevant income tax bracket matters.
- Wealth and gift taxes are also applicable to NRO accounts.
- An NRO account holder can get reduced tax benefits under DTAA (Double Taxation Avoidance Agreement)
Fund Transfer
- An NRE account holder can transfer money to an NRO account or multiple NRO accounts.
- An NRO account holder can transfer money only to another NRO account, and money can not be transferred to an NRE account via an NRO account.
Amount Deposit or Withdrawal
- Money earned overseas can be deposited in NRE and NRO accounts, even in foreign currency.
- The amount earned in India (Indian currency) can not be deposited in NRE accounts but only in NRO accounts.
- One can withdraw money from an NRE or NRO account only in Indian rupee.
Joint Account Holding
- Both parties must be NRIs to have a joint NRE account.
- Section 6 of the Companies Act 1956 states that an NRI can have a joint NRO account with another NRI or an Indian resident.
Similarities Between An NRE account And NRO Account
NRE and NRO both accounts are Indian rupee accounts and can be opened as savings accounts or current accounts. These accounts are basically intended for non-residential Indians who are earning in India and in a foreign country. Additionally, the mandatory monthly amount an individual has to maintain in both accounts is INR 75 000.
Importance of NRE and NRO Accounts in Stock Trading
An NRE account is essential to invest your foreign earnings back in India. An NRI can link its NRE account with its Demat account to invest in India without hassle. The flexibility provided under these accounts ensures that NRIs can pick the best one per their requirements to trade in the Indian Stock Market. NRI can buy an initial public offering (IPO) and mutual funds using the linked NRE account and trade in Indian stock exchanges, including NSE and BSE.
DEMAT Account For NRI
Similar to an Indian resident, an NRI must also have a Demat account for holding stocks, securities, bonds, and other financial assets in India. However, it would not be a typical Demat account. There are two basic Demat accounts through which NRIs trade stocks in India: PINS (Portfolio Investment NRI Scheme) accounts and non-PINS accounts.
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