In today’s fast-paced world, many people have resorted to completing their education in foreign countries and settling down, while some opt to move abroad to get better employment opportunities and income scale. Usually, when people move to foreign countries, they also leave behind family members in India who are financially dependent on them or have inherited properties in their home country.
In such conditions, people working and living outside India, also called Non- Resident Indians or NRIs, often face several challenges while transferring money to their home accounts in India for family expenditure or other investment purposes.
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There are certain rules and information required for such people to know about such transfers and further understand the role of different bank accounts meant for NRIs who want to invest in India.
A person becomes a non-resident under the Foreign Exchange Management Act (FEMA) as soon as he leaves India for employment in any foreign country based on income tax laws. In such a situation, people need to intimate their banks about the changes in their residential status to avoid penalties. However, many often fail to do so, thus inviting the risk of paying a hefty penalty. However, a few wise decisions before moving abroad can ease quite a lot of problems.
Bank accounts for NRIs in India
In order to overcome challenges faced by NRIs working abroad or sometimes in the country, banks in India provide an option to open Savings, Current, and Fixed Deposit accounts for such people to help them transfer their money from foreign countries to their home accounts and further also repatriate the funds back when required.
The two bank accounts allowed for Indians living abroad are the Non-Resident External (NRE) account and the Non-Resident Ordinary (NRO) account. These accounts can be opened by anyone under the category of Non-Resident Indians (NRIs), Persons of Indian Origin (PIO), and Overseas Citizens of India (OCI).
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Difference between NRE and NRO accounts
Speaking about NRE accounts, it is opened in the name of an NRI who wants to deposit his foreign earnings in India. NRO accounts are meant for NRIs who want to manage their income in India including rent, dividend, pension, or interests.
The interest earned on an NRE account is exempted from tax. NROs are taxable according to the Income Tax Act 1961.
In the case of NRE accounts, NRIs can easily repatriate the principal amount along with the interest without any permission, while in NRO accounts, there are certain rules and procedures for the same.
A person willing to open an NRE account can open one with another NRI. In the case of NROs, one can open the account with one or more NRIs or Indian citizens.
While speaking about the exchange rate risks, in the case of NRE accounts, deposits or withdrawals if made in INR will not invite any changes in the exchange rate, while NROs can face such risks.
