NRE account: Eligibility to open, uses, transferability, tax on interest income

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As many Indian citizens emigrate from India either for education or employment, it is important for them and their family members here in India to know about the various bank accounts of a person who has become a non-resident under FEMA (Foreign Exchange Management Act) can open here in India.

Who can open this account and currencies in which this account can be opened

An NRE account can only be opened by a person of Indian origin or a person who has become a non-resident under FEMA. Both categories of people are referred to as NRIs for further discussion. Unlike an NRO account which can be created after you notify your bank that you have become a non-resident and your bank designates your existing bank account as an NRO account, the NRE account can only be opened again after you became an NRI under FEMA. The NRE account can only be opened by an NRI personally and not by an agent. One can maintain more than one NRE account in India. One or more NRE accounts can be opened jointly with any other NRI but not with another resident. In addition, a person of Pakistani or Bangladeshi nationality cannot open the NRE account.

Money between different NRE accounts can be freely transferred without any limits. An NRE account can either be a savings bank, current account, fixed deposits or recurring deposit etc. An NRE account can only be opened in Indian Rupees and no other currencies.

Please note that once you return to India permanently, you should contact the bank and the bank will designate your existing NRE accounts as resident accounts and banking and tax provisions will apply accordingly.

What can be credited to the NRE account and what debits are authorized on it

An NRE account, for all intents and purposes, is treated like your bank account held in a foreign country Thus, the money in this account can be freely transferred outside India without any restriction. Since the amounts in your NRE account can be freely transferred outside India without any limit, the RBI only allows limited credits to these accounts. All money paid in from outside India in any permitted currency can be freely credited to the NRE account. Similarly, any amount realized on a check drawn on your foreign currency account can also be freely credited. Additionally, the proceeds of any draft or travelers check issued outside India can also be credited to the NRE account.

You can also credit all income as well as proceeds from the sale of investments made in India, whether in government securities or Indian corporate stocks/bonds, which have been made on a repatriation basis. Under the repatriation facility, you are allowed to return the proceeds of sale/redemption of money invested in India and income from such investments. Investments on the basis of repatriation can only be made from an NRE or FCNR (Foreign Currency Non Resident) account or by direct remittances from outside India.

You may also offer any foreign currency, while visiting India, that you brought and declared on the Foreign Currency Declaration Form upon landing in India, provided you are a non-resident under FEMA .

Debits from an NRE account are permitted for making investments in India either on a repatriation basis or on a non-repatriation basis. Money credited to this account can also be freely sent back outside India and can also be used for local payments. This account can also be used for EMI payment of home loans in India. Loans can also be obtained against balance security in these accounts in India as well as outside India.

Transfer between NRO account and NRE account

Your NRE account balance is freely transferred to your NRO account, but to transfer money from an NRO account to an NRE account, you must pay applicable taxes on the money to be transferred, if any, and follow the prescribed procedure, including a certificate from a chartered accountant. It is important to understand that once money is transferred from the NRE account to the NRO account, it loses its separateness and can no longer be freely transferred to the NRE account. So think twice before transferring your money from NRE account to NRO account.

Taxation of interest on the NRE account

Any interest on the NRE Account is fully exempt under Section 10(4)(ii) of the Income Tax Act without any limitation. Since the interest on these deposits is fully exempt, the bank will not deduct any tax on this interest at source. However, interest on the NRE account will become fully taxable once you become a FEMA resident.

Balwant Jain is a tax and investment expert and can be contacted at jainbalwant@gmail.com and @jainbalwant on Twitter.

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