Non Resident External Account—Pros and Cons
NRE Accounts and Rules
Persons of Indian nationality or origin residing outside of India may open, with authorised banks in India, Non-resident External Accounts (NRE Accounts), designated in rupees. These accounts can be in savings, current, or term deposit accounts. Opening of NRE Accounts jointly by two or more non-residents is permitted as long as all account holders are persons of Indian nationality or origin. To open such accounts, funds must be sent to India in one of the following ways:
(a) Proceeds of foreign exchange remittances from abroad through banking channels in an approved manner.
(b) Proceeds of foreign currency notes and traveller cheques brought into India by the non-resident while on a temporary visit to India.
(c) Transfer from an existing Foreign Currency Non Resident (FCNR) account of the same person.
The account holder must state on the account opening form that he will promptly send notice to his bank if and when he returns to India for permanent residence. Funds from an NRO (Non Resident Ordinary Rupee) account cannot be transferred into an NRE account as NRO funds are non-repatriable and NRE funds are repatriable.
Funds arranged by the account holder through banking channels from any country can be credited to this account. Income from the account holder’s investments funded originally from funds in the NRE account can be credited into it, except in cases where the investments were non-repatriable. In the event of non-repatriable investments, the funds must go into an NRO account.
Remittances from NRE accounts to the country of residence of the account holder or any other country are freely allowed.
What it means for you
You can send funds to India for investment, for example $10,000, through this account. After investing the money, all proceeds or profits can come back to the account and be sent to you in your country of residence as long as the investment was “repatriable”. A repatriable investment means you are allowed to take the profits and original investment back to your country of residence.
Power of attorney
Persons residing in India may take a Power of Attorney on behalf of a non-resident account holder, provided the powers are restricted to withdrawals for local payments. The resident power of attorney holder cannot repatriate funds held in accounts outside India under any circumstances or make payment of gifts on behalf of the account holder.
Account can also be opened by an eligible non-resident Indian during his temporary visit to India, against tender of foreign currency traveller cheques/currency notes, provided the bank is satisfied that the prospective account holder has not ceased to be a non-resident. The amount so tendered would be endorsed on the Currency Declaration Form (CDF) where applicable, before crediting the rupee equivalent to the account.
Operation of NRE Accounts
There are certain restrictions on the transactions of NRE accounts and some forms such as Form A2 and A4 may need to be filed, for example for purchase of real estate, termed immovable property, or other transactions requiring special permission from the Reserve Bank.
Change of Status from Non-resident to Resident
Immediately upon return of the account holder to residency status in India, the NRE account will be designated either as a resident rupees account or converted to a Resident Foreign Currency Account (RFC) at the discretion of the account holder.
However, if the account holder is only on a short visit to India, the account will continue to be treated as NRE account even during his stay in India. In respect of funds held in fixed deposits in NRE Accounts, interest will be payable at the rate originally fixed, provided the deposit is held for the full term, even after conversions into resident account.
Advantages of NRE Account
- Term deposits for one year and above made by non-residents carry higher interest rates than those available to residents in India.
- The interest on deposits and any other income accruing on the balance in the accounts are free of Indian Income-tax.
- The balances in the accounts are free of Wealth-tax.
- Gifts to close relatives in India from out of balances in the accounts are free of Gift-tax, when gifted before 1st October, 1998, thereafter there is no gift tax in India.
- The entire credit balance (inclusive of interest earned thereon) can be repatriated outside India at any time without reference to the Reserve Bank.
- Local disbursement from the accounts can be made freely.
- Investments easy to make. Purchases of mutual funds, Central and State Government Securities and National Plan/Savings Certificates can be made freely from the balances in these accounts.
- Sale proceeds/maturity proceeds/repurchase price of mutual funds, securities or certificates originally purchased out of the funds in the account can be freely credited to these accounts by banks, without reference to the Reserve Bank.
- Account holders are supplied special series of cheques for operations on these accounts.
- Account holders can avail of loans/overdrafts from banks against security of fixed deposits in their NRE accounts.
Disadvantages of NRE Accounts: Currency fluctuation risk
NRE accounts are opened in Indian rupees and all foreign exchange remittances received for credit of those accounts are first converted to Indian rupees at the buying rates by the banks. Any withdrawal in foreign currency will be permitted by the bank by converting Indian rupees in the account to foreign currency at the selling rate. This conversion loss is to be borne by the account holder.
Exchange rates are subject to fluctuation on a day to day basis and the Indian rupee could depreciate against foreign currencies. Balances held in Indian rupees in NRE accounts are thus exposed to exchange fluctuation risk.
The author, Ariadne Horstman, is a financial planner at InvestmentYogi.