Off late it is seen that the number of Indians going abroad for jobs or for studies is increasing rapidly. Even after changing their residential status from Residents to Non-Residents Indians they are maintaining and operating their savings account in India in their own names. Here, the NRE Account comes to play a significant role in helping them out. In a report from 2018, it is seen that India has received foreign remittances amounting to 79 billion US$.
Basically, for remitting foreign earnings to India, NRIs must open a Rupee denominated account popularly known as NRE Account. The Foreign Exchange Management Act or FEMA does not allow a Non-Resident Indian to operate a savings account in his name in India which may attract penalties if violated. In this article on Learn How To Make More Money With NRE Accountwe would discuss What is NRE Account, NRE Account Benefits, NRE Account Rules, NRE Account Taxation.
What is the meaning of NRE account?
When an individual of Indian origin becomes Non-Resident Indian or NRI due to his stay outside India pertaining to his jobs or studies or for any other reasons whatsoever and earns in foreign currency, he is required to open an NRE account if he wishes to remit his foreign earnings to India. He would remit his foreign earnings in foreign currency say Dollars or Pounds, and Indian banks would convert his remittances in (₹)INR as per the applicable foreign exchange rates.
Since his residential status has been changed, he is no more permitted to open or operate a savings account in India as per the FEMA Act. For example, Mr. Sourabh Shukla is staying in the United States for the last five years or more and currently is a Non-Resident Indian.
He is earning in US Dollars and decided to remit $5000 to India. But he is having a savings account only here in India. In this scenario, Mr. Sourabh is required to open an NRE account so that he can remit his US$ earnings in this account operated in (₹)INR.
Therefore, NRE Account is a facility provided by all leading banks of India for Non-Resident Indians, which is maintained and operated in Indian Rupees(₹) only. When an NRI sends his foreign earnings e.g. in US$, the Indian bank converts this into INR and deposits the same in his NRE account. The amount deposited in this account may be used for payment of expenses and even making investments in India as well.
What is the benefit of NRE account?
By having an NRE Account, a Non-Resident Indian enjoys the following most popular benefits:
- Repatriation: Any amount deposited in this NRE account are freely repatriable to the country of residence of the NRI. There is no such restriction on the money transfer from this account. NRI is always permitted to convert his deposited amount in the foreign currency of his present residing country without out paying any taxes;
- Taxability: Both interest and principal are completely tax-free in India. This means any interest earned from this NRE account deposits are tax exempted to the hands of the NRI. For example, interest earned from any NRE savings account, Fixed Deposits, Recurring Deposits or any other alike investments, are neither subjected to TDS nor taxable by what so ever;
- Power of Attorney: An NRI is allowed to appoint a Power of Attorney to a resident individual on this NRE account for making withdrawals for local payments in INR and for remitting funds to others using normal banking channels like a savings account in India. The power of attorney holder is also supposed to receive a Debit card and cheque book. This helps the family members immensely of the NRI, who are residing here in India;
- Loan approval: The most important benefit of this account is that one can obtain loans from this account up to 90% value of the deposits or against FDs associated with this account.
- Joint account: The Govt. of India allows opening a joint NRE account only with another Non-resident Indian.
- Benefits of redesignation: Once the NRI leaves his country of residence permanently and returns to India to stay here permanently, this account can be redesignated as a normal savings account;
- Deposit in Foreign currency, withdrawal in (₹) INR: This account permits deposits or remittances in any foreign currency and allows withdrawals in (₹)INR only.
- Direct Investments: An NRI is permitted to make direct investments in India only using the deposits from this account.
What are the NRE account Rules?
Primarily the following rules are followed while opening the Non-Resident External Account.
1. This account can only be opened by an NRI or person of Indian origin(PIO).
2. The residents of Pakistan and Bangladesh are required to obtain prior approval from the RBI for opening this account.
3. Power of Attorney may be appointed by the NRI for operating this account if he wishes to.
4. This account is only ₹ denominated account and is maintained in INR only. One can open a simple savings account, current account, and an FD.
5. Interest income earned from this account is completely tax-free. No tax is charged on the principal amount either.
6. Money deposited in this account is completely repatriable to the country of residence of the account holder. There is no such restriction on such money transfer from this account.
7. Income such as rent, dividend, salary, pension, interest, and other alike incomes are permitted to transfer or remit to this account.
8. Income earned or generated in India is not allowed to be deposited into this account.
9. Amount withdrawal from this account for meeting certain expenses in India can only be done in INR(₹).
10. Fund transfer from other NRE or FCNR accounts to this account is permitted.
11. Money deposited in this account can be utilized for making direct investments in stocks or mutual funds in India.
12. One can appoint a nominee for the NRE savings account.
13. The minimum balance maintenance requirement is as low as ₹ 10,000/-.
14. This account can be easily converted to resident savings account if the NRI returns to India permanently.
15. This account is regulated by the Foreign Exchange Management Act / FEMA.
Is NRE account taxable?
Most interestingly the NRE account is completely tax exempted. This means the interest income earned from this account along with the principal amount or the Fixed deposit is not subjected to income tax or TDS in India. Also, there is no income tax on money transfer from this account outside India.
This is very important to keep in mind that only income generated from this NRE account is tax-free. But any income generated in India by the NRI by other means is subjected to income tax. Therefore, this account has no kind of income tax is associated with it for any income generated from this account.
Some general Frequently Asked Questions (FAQs) on NRE Account.
Why is NRE account required?
Just imagine you are an NRI and employed abroad. Now you are earning in foreign currency there. If you wish to send money to your family here in India for meeting daily needs. How would you transfer money? Because you can not directly transfer your earnings in foreign currency in a savings account in India.
For that, you must open an account which is named NRE account. After that, you can appoint your family members as a power of attorney to this account, they will then be eligible for withdrawal of funds from this account for meeting their daily needs. Also, if you wish you can repatriate the amount deposited in this account to your foreign account without any kind of restriction as of now.
Do I have to pay tax on NRE fixed deposit?
Not at all. Since the main purpose of allowing this account opening by the Govt. of India is solely remitting foreign currency to India. This account acts as a promotion of remitting foreign currency back to India. Therefore, neither the fixed deposit nor the interest earned on this account is taxable. So, you can enjoy tax-free interest income from the NRE Fixed Deposit which is reasonable appreciating for you.
How can I deposit money in my NRE account?
For remitting your hard-earned foreign currency in your NRE account in India, you can use various remittance services provided by the leading Indian banks such as SBi express, ICICI money2India, HDFC remit2India to name a few.
Again there is another option like direct wire transfer to your NRE account if your foreign bank allows such transaction. Also, you can directly deposit foreign currency to your NRE account if you visit India.
Is TDS deducted on NRE fixed deposit?
As I mentioned earlier, no income from this NRE account is subjected to tax as long as your residential status is NRI. Therefore, this account is not subjected to TDS as well. You can transfer for this account to your foreign account without paying any tax also. But any other income generated by the NRI not linked to this account from India is fully taxable in the hands of the NRI.