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Taxation of NRE, NRO and FCNR

According to the Income Tax Act, the taxation of NRE NRO FCNR is mandatory in India. An NRI (Non-Resident Indian) generating income or earning in India as well as in foreign countries generally faces difficulties while managing his or her finances including savings and investments. It is quite difficult to keep track of the bank accounts in India while sitting in a different country and also it becomes more challenging to repatriate money to the home country.
Taxation Of Nre Or Nro Or Fcnr
To overcome this issue, Non-resident external and ordinary has been introduced. The details of these accounts have been discussed in this article.

Table of Contents

What is the Non-Resident Accounts?

Taxation of NRE NRO FCNR

According to the provisions of the Foreign Exchange Management Act (FEMA), a Non-Resident Indian (NRI) cannot have a savings bank account in India in his or her name. The guidelines state that an NRI must convert all his or her savings earned in a foreign country to a Non-Resident External Account or Non-Resident Ordinary account. Thus, If an NRI continues to use the savings bank account in India then it can attract heavy penalties. Hence, opening an Non-resident external and ordinary is a good and reliable option for NRIs. Opening an Non-resident external and ordinary account helps an NRI in the following two ways:
  1. NRIs can send their foreign incomes or earnings to India any time without any hassle.
  2. NRIs can also retain their incomes or earnings earned in India in the home country in a hassle free manner.

What is a Non-Resident External Account?

A Non-Resident External Account refers to an Indian Rupee-Denominated Account that offers complete security of the funds. It is to be noted that NRE accounts can be in the forms of recurring, current, savings or fixed deposits. In these accounts, foreign currency deposited can be converted into Indian currency. Also, NRIs can send or transfer funds such as interest as well as principal amount from an Non-resident external account to a foreign account without any hassle and complications. Also, the account holder must note that the amount he or she is depositing in the Non-resident external account should be earned from foreign countries.

There are so many benefits of opening a Non-resident external account. Some of the benefits of opening an NRE account are mentioned below:
  • NRIs can use the international debit card of such an Non-resident external account which enables them to transact and withdraw money 24X7.
  • Mutual Funds investment can become instant and effortless by linking the NRE account number to the investment account
  • Non-resident external account also helps to use making investments, personal banking or carrying out business in India.

What is a Non-Resident Ordinary Rupee Account?

A Non-Resident Ordinary Rupee account refers to current or savings managed and held by NRIs in India for their income earned in India. The NRO account holder must manage and deposit their accumulated funds in Indian currency without any complications or restrictions. The NRO account helps to receive funds in foreign currency as well as Indian currency. One can apply for an NRO account as a joint account as well with an NRI as well as resident Indian. Also, it seems feasible to transfer or send money to or from the NRE account. However, there is a limitation to this account, that the interest earned from this account is subject to tax and TDS (Tax Deducted at Source) will be deducted for the same.

What is Foreign Currency Non Resident Account?

The full form of the term FCNR is Foreign Currency Non Resident Account (Banks) Account Opening. This account is a fixed deposited type of account that is opened by an NRI to deposit income earned outside Indian or foreign income. This account is basically held in 7 foreign currencies such as HKD (Hong Kong), GBP(UK), USD (US), CAD (Canada), JPY(Japan), AUD(Australia) and SGD (Singapore).
FCNR account is considered as one of the convenient and feasible options like Non-Resident Ordinary  Account and NRE Fixed Deposits account for opening a bank account in India for NRIs. Also, an NRI can open an this account as a joint account with another NRI or NRIs.

FCNR Fixed Deposits are termed as one of the best investment options for Non-Resident Indians who are looking forward to retaining their savings in foreign currency with a view to earn good return on the earnings of foreign currency. It is to be noted that these fixed deposit accounts and not savings accounts. As mentioned earlier, the currencies of the 7 countries can be placed in this account including the United Kingdom, United States of America, Canada, Australia, Hong Kong, Singapore and Japan.

The maximum and minimum tenure of opening a FCNR are 5 years and 1 year respectively. Its rates of interest term deposits are basically payable after the end of the first year. The interest earned from this account is compounded on a half yearly basis after the completion of first year.

The difference between NRE & NRO Accounts

The following are some of the differences between an Non-resident external and ordinary account:
  • An NRE account is a savings or current or fixed deposits bank account opened by an NRI on his or her name in India in order to deposit his or her income generated or earned outside India. On the other hand, an NRO account is also a bank account opened by an NRI in his or her name in order to manage the incomes earned by him or her in India. The aforesaid incomes may include dividend, pension, rent, interest etc.
  • Non-resident external accounts are tax -free accounts. It is to be noted that balance or interest earned on these accounts are taxable. However, in case of NRO accounts, the interest earned is taxable at the rate of 30% under the provisions of the Income Tax Act, 1961.
  • The principal amount and interest accumulated in an Non-resident external account is open for repatriation. In simple words, an Non-resident external account holder can transfer the aforesaid amounts to a foreign account. However, in the case of an NRO account, the interest amount can be repatriated and the principal amount can only be remitted up to USD 1 million USD in a financial year.
  • An NRO account can be opened by one or more NRIs or Indian Residents as joint account holders.  However, in the case of an Non-resident external account, a joint account can only be opened by one or more NRIs.
  • An NRI can open a joint NRO account with one or more NRIs or Indian citizens. However, there can be a joint NRE account only with another NRI.
  • In any of these accounts, income earned outside India can be deposited. However, income generated or earned in India can only be deposited into the NRO account. Also, the money from both of these accounts can only be made in Indian currency.
  • In the case of an NRO account, if the deposits and withdrawals are done in Indian currency, then there is no risk of exchange rate. But in case of Non-resident external account there will be fluctuations in the currency which can lead to risk in exchange rate.

Taxation of Non-Resident External Account

The interest income from Non-Resident External Account, earned by any individual is tax free in India. In simple words, any interest earned from an Non-resident external account is exempt from tax as per the provisions of income tax laws of India. However, the individual must qualify as a “Person Resident Outside India” or NRI under the exchange control law Or the Reserve Bank of India (RBI) has permitted the individual to maintain a NRE account in India. It is to be noted that the rules and guidelines of determining the residential status under the Foreign Exchange Management Act are different from Income Tax Act laws in India.

Under the provisions of the exchange control law, when a person leaves India for business or employment purposes or for any other reason with an intention to stay outside India for an uncertain period such person may be considered as a “Person Resident Outside India”. Further, when such person permanently returns to India, then he or she may be called as a Person Resident in India.
Accordingly, basing on the residential status under the provisions of the exchange control law or by permission of the Reserve Bank of India an individual can maintain an NRE account and interest income earned from such account is tax-free in India as per the provisions of income tax laws in India. A taxpayer must report such interest income while filling the ITR under the Scheduled Exempt Income category as exempt.

Taxation of Non-Resident Odinary Account?

According to taxation laws of India, the income earned by the NRIs in India is taxable and NRIs are subject to tax if the income is earned in India. The accrual of funds through various investments including dividends or interest, receiving rent on property, collecting consulting fees are some of the examples of income earned in India for NRIs. As mentioned earlier, an NRI is obliged to pay taxes on such amounts. Some of the examples of where the NRI has to pay taxes are mentioned below:
  • Capital Gain earned on Investment in India
  • Any salary or consulting fees earned in India
  • Any income received from house property located in India
  • Interest income earned from the NRO deposits accounts
It is to be noted that all the earnings received in the NRIs account whether it is earned in India or foreign countries, the tax implication of NRO account will come. According to the taxation laws of India, the earnings received through the NRO account is taxed at the rate of 30% plus the applicable cess and surcharge.
Although there is an NRO taxation implication, an NRI can take advantage from the Double Taxation Avoidance Agreement (DTAA). A Double Taxation Avoidance Agreement refers to a scheme that is signed by Indians with more than 90 countries across the globe so that NRIs can claim the tax credits while filing taxes in the residence country by following a few simple procedures as per the DTAA agreement. Accordingly, an NRI can earn the tax credit for the taxes paid in India against the tax liability of the country of his or her residence.
In order to get the benefits of the Double Taxation Avoidance Agreement (DTAA), an NRI has to submit the following documents:
  • Self declaration format by the Chartered Accountant to deduct TDS in India
  • Tax Residence Certificate issued by the relevant authority of the residence country

Taxation of FCNR Account

As per the law, the interest earned from FCNR account is not subject to tax in India. In simple words, it is tax free in India. However, the interest earned from an FCNR account may be taxable in the country of residence of the NRI and again it depends on the laws and regulations of the country where the NRI resides. Also, it is to be noted that the interest generated from an FCNR account is exempt from tax if the NRI qualifies himself or herself as an NRI or Not Ordinarily Resident in India.

It is also to be noted that the interest earned from the FCNR account may vary from currency to currency. Also, it depends on the bank’s regulations as different banks offer different rates of interest. This can be better analyzed with the help of an example. For example, the interest rate of an FCNR account for 1 year in US currency will be different from Australian currency for the same amount of deposits. Generally, the rate of interest on FCNR deposits accounts are decided by the Board of Directors of that particular bank considering and under the mandatory regulations of the Reserve Bank of India (RBI).

Conclusion

From the above analysis and explanation, it can be concluded that all of these accounts such as NRE, NRO and FCNR are quite different from each other but have significant advantages for the NRI to transfer, invest assets or savings to India.

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