Till a person is a resident of India, he can have the regular resident savings accounts and fixed deposits. However, as per the Foreign Exchange Management Act (FEMA), a person who becomes resident out of India (or in simple terms, an NRI) cannot have these basic resident accounts. He has to “re-designate” these accounts as non-resident accounts.
There are detailed rules on what can be credited and debited in the non-resident accounts. The basic idea/intention of RBI is to have some sense of the flow of foreign currency as India still does not have full rupee convertibility. So, before re-designating the resident accounts to NRI, one has to understand the purpose & related implications.
In this regard, today, I will try to explain about NRO account. An NRO stands for Non resident (Ordinary) Account.
Basic features
NRO accounts may be opened / maintained in the form of current, savings, recurring or fixed deposit accounts. One can hold the accounts jointly with residents and / or with non-residents. One can also operate the account through a power of attorney holder granted in favour of a resident however it can be done only for select transactions.
Permissible transactions in the account
A. Debits
- All local payments in rupees including payments for investments in India subject to compliance with the relevant regulations made by the Reserve Bank.
- Transfer to NRE account of NRI within the overall ceiling of USD one million per financial year subject to payment of tax, as applicable
- Remittance outside India of current income like rent, dividend, pension, interest, etc. in India of the account holder.
- Payment w.r.t. international credit cards
- Remittance up to USD one million*, per financial year (April- March), for all bona fide purposes, to the satisfaction of the bank
* Please note that in this case, a CA certification may be required in Form 15CB in some cases.
B. Credits
- Legitimate income in India of the account holder which includes current income like rent, dividend, pension, interest, etc.
- Proceeds of remittances from outside India through normal banking channels received in any permitted currency.
- Any foreign currency, which is freely convertible, tendered by the account holder during his temporary visit to India.
- Rupee gift received from a resident close relative.
- Rupee loan from resident close relative
- Transfers from rupee accounts of non-resident banks.
- Sale proceeds of assets including immovable property acquired out of rupee / foreign currency funds or by way of legacy /inheritance.
Special provisions for foreign nationals of non-Indian origin
Foreign national of non-Indian origin who are on a visit to India is allowed to open NRO account with funds remitted from outside India through banking channel or by sale of foreign exchange brought by him to India.
The balance in the NRO account may be converted by the bank into foreign currency for payment to the account holder at the time of his departure from India as per the period that the account has been maintained as follows:
- Not exceeding six months: Allowed
- More than six months: Apply on plain paper to the Regional Office concerned of the Reserve Bank.
FEMA rules also contain a special provision for remittance. A citizen of a foreign state, not being a citizen of Nepal or Bhutan or a Person of Indian Origin (PIO), who –
- has retired from an employment in India,
- has inherited assets from a person,
- is a widow resident outside India and has inherited assets of her deceased husband who was an Indian citizen resident in India,
may remit a maximum of USD 1 MN per financial year out of the balances in the account, on production of documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter, subject to payment of taxes.
Interest rates on NRO bank account & fixed deposits
- Banks are free to determine their interest rates on both savings deposits and term deposits of maturity of one year and above. However, interest rates offered by banks on NRE/ NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits.
- These deposits may not be withdrawn prematurely unlike resident FDs except in special cases like govt. directives or death of borrower.
- The minimum tenor of NRO term deposit is seven days and maximum is as per the Company’s policy.
- Banks are prohibited from payment of additional interest on Non-Resident deposits of Senior Citizens.
- Funds from an NRO Savings Account cannot be used to open an NRE Fixed Deposit
Change in residential status
From Non- resident to Resident:
NRO accounts may be re-designated as resident Rupee accounts on return of the account holder to India for taking up employment, or for carrying on business or vocation or for any other purpose indicating his intention to stay in India for an uncertain period. Where the account holder is only on a temporary visit to India, the account should continue to be treated as non-resident during such visit.
From Resident to Non-resident:
- When a person resident in India leaves India for a country (other than Nepal or Bhutan) for taking up employment or for carrying on business or vocation outside India or for any other purpose indicating his intention to stay outside India for an uncertain period, his existing account should be designated as a Non- Resident (Ordinary) Account.
- Foreign nationals who come to India on employment and become residents and are eligible to open/hold a resident savings bank account and can re-designate that account as NRO account on leaving the country so as to receive their legitimate dues subject to certain conditions.
Tax implications of NRO account
Interest from NRO account is taxable as per Indian tax law. Income will have to be shown under “Income from other Sources” if the NRI is planning to file a return in India. A corresponding deduction can be availed u/s 80TTA upto maximum of Rs. 10,000 (not available in case of fixed deposit). TDS is deductible at a flat rate of @30.90%. NRI cannot provide Form 15G/H. If you’re a tax resident of your host country and India’s DTAA with that country permits a lesser rate, you can apply to the bank for the same along with a self-declaration and quoting your tax identification number/ residency certificate, as per bank’s policy.
Sources: RBI Master Circular on NRO account and Interest rates on deposits
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