When you are an NRI, the banking rules and accounts changes for you. If you follow these rules and implement from start, it will be easy for you to transact, send money and invest. So let’s learn the basic concepts behind NRI account repatriable TDS and other terms.
So the changes start happening when you acquire the status of an NRI. The first thing before leaving India you should be doing is:
If you have multiple bank accounts, you will have to consolidate them and switch to an NRO (non-resident ordinary) account.
What is NRO account?
An NRO savings account is where you can maintain and manage your income earned in India, such as from rent, dividends, and pension.
When an Indian National / PIO resident in India leaves for taking up employment, etc. outside the country, his bank account in India gets designated as NRO account. He just needs to approach his bank for updating.
These are Rupee denominated non-repatriable accounts and can be in the form of savings, current recurring or fixed deposits. These accounts can be opened jointly with residents in India.
The deposits can be used to make all legitimate payments in rupees. Interest income, from NRO accounts, is taxable. Interest income, net of taxes is reportable. NRO account can be funded through any of the following sources:
- Proceeds of foreign exchange remittance from abroad through banking channels in an approved manner
- Foreign currency notes and traveler cheques brought into India by the non-resident while on a temporary visit to India.
- By transfer from an existing non-resident account in the name of the same person.
- From a local funding representing bonafide transactions in rupees.
What is NRE account?
NRIs, PIOs, OCBs are eligible to open NRE Accounts. These are rupee denominated accounts and can be in the form of savings, current, recurring or fixed deposit accounts. Accounts can be opened by remittance o
f funds in free foreign exchange. Foreign exchange brought in legally, repatriable incomes of the account holder, etc. can be credited to the account. Joint operation with other NRIs/PIOs is permitted. Power of attorney can be granted to residents for the operation of accounts.
The deposits can be used for all legitimate purposes. The balance in the account is freely repatriable. Interest lying to the credit of NRE accounts is exempt from tax in the hands of the NRI. Funds held in NRE accounts may be freely transferred to FCNR accounts of the same account holder. Likewise, funds held in FCNR accounts may be transferred to NRE accounts of the same account holders.
The amount can be deposited in this account only by way of an inward remittance. The interest received in this NRI account is exempt from tax as long as the individual as a nonresident under the FEMA. While the interest rate given by bank on NRE deposit is generally similar to the interest given on resident account since the balance in the NRE account is held in Indian rupees it is exposed to foreign exchange fluctuation risk.
What Is Foreign Currency (Non-Resident) Accounts FCNR (B)?
NRIs / PIOs / OCBs are permitted to open such accounts in US Dollars, Sterling Pounds, Australian Dollars, Canadian Dollars, Japanese Yen and Euro. The account may be opened only in the form of term deposit for any of the following maturity periods;
- one year and above but less than two years
- two years and above but less than three years
- three years and above but less than four years
- four years and above but less than five years, and
- five years.
While NRE account may be open in the form of saving, current, recurring or fixed deposit account FCNR can be open in only in the form of fixed deposit.
Interest income is tax-free in the hands of NRI until he maintains a non-resident status or a resident but not ordinarily resident status under the Indian tax laws. Money lying in FCNR (B) accounts can also be utilized for local disbursements including payment for exports from India, repatriation of funds abroad and for making investments in India, as per foreign investment guidelines.
TDS on NRO Account
Based on the IT Act, banks are required to deduct tax at source on the interest paid.. This is deducted on the maximum marginal rate –currently 30.9%.
However, some banks practically deduct tax at a maximum marginal rate from the date of change of dates from resident bank account to NRO account. This is even if the individual continues to qualify as a resident as per IT Act for that Fiscal years.
So due to TDS, NRI whose total income is taxable at a lower slab rate or who have an effective tax rate which is much lower than 30% may end up in a tax refund situation.
What is the meaning of Repatriate?
It refers to the ability of an asset to be moved from a foreign country back to an investor’s home country. Assets such as cash and securities are considered highly repatriable. Assets such as foreign real estate and business ownership are considered to have a low level of repatriability.
Barriers to repatriation may include the physical nature of the asset, laws of the foreign country, and laws of the investor’s home country.
E.g. When an NRI transfers money in the US $ /GBP or any other currency to IVBL NRE/NRO account, the process is called Inward remittance process wherein the corresponding currency is converted to Indian Rupees (INR).
On the other hand, when the customer takes his money back from India to his country of residence through outward remittance process, INR is converted back to the corresponding currency, say, INR to US $ /GBP or any other currency.
The deposits in NRE and FCNR accounts are freely repatriable outside in India without any as per limit. NRI is also allowed to remit funds outside India from their NRO account up to $1 million per financial year.
NRI from NRO account, can fully remit his current income like rent, dividend, pension, interest on NRO account etc. . This is an addition to $1 million limits.
So to summarize:
Hope this removes all doubts related to banking transaction when you become an NRI. If you have a query, please send it in through the comments section below.