As per the RBI (Reserve Bank of India) notifications under the Foreign Exchange Management Act (FEMA), a Non-Resident Indian (NRI) can hold bank accounts in India as an NRO account or NRE account. NRO stands for Non-Resident (Ordinary) account, and NRE stands for Non-Resident (External) account. These accounts differ in terms of acceptance of rupee credits, free repatriability of account balances, operational flexibility and convenience, etc. When it comes to receiving Rupee credits in NRI accounts, they can be received only in NRO accounts. As such, NRO accounts are preferred by the NRIs when they have regular sources of income within India. If one holds an NRE account, the income from investments within India cannot be credited into such accounts, as these accounts cannot receive credits from within India in Indian currency, except another NRE account.
Benefits of Sending Money to NRE Accounts
The two significant benefits of sending money to NRE accounts are as below:
- Full Repatriation of Account Balances – NRE accounts provide full and unrestricted repatriation of account balances. As such, the account holder can freely transfer such funds abroad without any limits. In contrast, the account balance in NRO accounts is repatriable only up to specified limits specified by the Reserve Bank of India (RBI) under the FEMA (Foreign Exchange Management Act) guidelines. As of date, such limit is USD 1 Million per financial year for the funds transferred into such accounts, and there are no restrictions regarding the interest income. One can transfer money from an NRO account to the NRE account and enable the change of colour of the account balances from restricted repatriability to free repatriability.
- Tax Benefits – The interest income from NRE accounts is exempt from tax for the account holders. As such, the account holder is not required to undertake any tax payments or tax compliances if their incomes pertain only to NRE accounts. In contrast, there is no tax exemption on the interest income from NRO accounts.
- Account Operation through Resident Mandate Holder – An NRI can also use an NRE account to remit the funds to India and appoint a resident mandate holder, usually a close relative, to operate the account and withdraw the funds if required. Such account operation allows easy access of the account balance to the mandate holder, which the NRI can also use to remit funds for family sustenance in India.
How to Transfer funds from NRO Account to NRE Account
There might be certain situations when one may have opened an NRO account specifically for certain transactions, like receiving the sale proceeds of Indian assets, investment income, redemption proceeds from mutual funds, etc. The account holder may wish to transfer the account balances from NRO to the NRE account and close the NRO account in such circumstances. However, the process of transferring such funds is not straightforward. The transfer of funds from NRO accounts to NRE accounts is considered repatriation and is subject to additional documentation and procedural compliance. The account holder must provide necessary documents to the Authorized Dealer Bank (AD Bank), including NRO Repatriation application, FEMA declaration (Form A2), Form 15CA, and 15CB (as applicable) and supporting documents for the source of funds being transferred. Ascertaining and mentioning the correct transfer code is necessary to establish the correctness of filings made to the Income Tax Department. It also helps to ascertain that the taxes have been duly paid before such repatriation of funds and also allows the RBI to categorize the reporting data suitably for remittance purposes.
Disclaimer – The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules, as tax benefits are subject to changes due to change in tax laws.