Closer look to nre & nro a/c taxability

@VaibhavJ (Believe!! Live your dreams!)   (33516 Points)

18 December 2012  

 

There are two options an NRI interested in opening a bank account in India can choose from – an NRE or an NRO account. Are you an NRI keen on getting a bank account opened in India? Then it would be advantageous to know how these two types of accounts differ and which one is right for you.

 

The Government of India has permitted NRIs to open rupee accounts in India in order to repatriate funds from their home countries. The two most common accounts are the NRE and NRO accounts. Let’s take a closer look at them.

 

Who is Non-resident Indian / Persons of Indian origin?

Those Indian residents, who are in employment, studying and staying permanently abroad and foreign nationals (except of Pakistan and Bangladesh) with their origin in India. Students proceeding abroad for higher studies are treated as Non-residents.

 

What’s an NRE account?

A Non-Resident External (NRE) account is a bank account that’s opened by depositing foreign currency at the time of opening a bank account. This currency can be tendered in the form of traveler’s checks or notes.

 

What’s an NRO account?

A Non-Resident Ordinary (NRO) account is the normal bank account opened by an Indian going abroad with the intention of becoming an NRI. An NRI can also open this account by sending remittances from his home country or by transferring funds from his other NRO account. It offers the same facilities as an NRE account, except that any repatriation done through this account should be reported to RBI by filling up prescribed forms.

 

How do NRE and NRO accounts differ?

Funds remitted from overseas sources or local funds that would otherwise have been sent to the accountholder abroad can instead be transferred to NRE Accounts. On the other hand, local funds that aren’t eligible to be remitted abroad must be credited to an NRO account.

 

While, an NRE account is for depositing income from abroad, NRO account is mainly for putting Indian incomes.

 

In case of NRE account, only NRIs can become joint account holders but for NRO account both resident and non-resident can become joint account holders.

 

The decision was taken based on recommendations of K J Udeshi Committee which reviewed the facilities for persons under Foreign Exchange Management Act, 1999.

 

Can you transfer funds from an NRE to an NRO account and vice versa?

It’s easy to transfer funds from an NRE to an NRO account. But it’s not possible to transfer funds from an NRO account to an NRE account freely. The Reserve Bank allowed non-resident Indians (NRIs) to transfer funds from non-resident ordinary (NRO) account to Non-Resident External (NRE) account subject to a ceiling of $1 million in a financial year subject to payment of tax.

 

What’s the difference in the tax treatment for interest earned on an NRE and an NRO account?

The interest earned on any type of NRO bank as well as the credit balances in this kind of account are taxed under the account holder’s tax bracket. On the other hand, interest earned on the NRE account is totally exempted from income tax, and the credit balances in the account don’t attract any wealth tax. Any gift given to a close relative doesn’t attract gift tax.

 

SOURCE: WEB