Under the Foreign Exchange Management Act (FEMA), the moment your status changes from a Resident Indian to a Non-Resident Indian (NRI), your banking structure must change immediately. Holding a standard resident savings account as an NRI is a violation of the law.
You are required to convert your existing accounts or open new ones under two specific categories: Non-Resident External (NRE) and Non-Resident Ordinary (NRO). Understanding the boundary between these two is critical to avoiding heavy penalties and frozen funds.
1. The Basic Framework: NRE vs NRO
The structural difference comes down to the source of the funds being deposited.
- NRE (External) Account: Designed strictly for foreign earnings remitted back to India. The funds must originate from outside India in a convertible foreign currency. It acts as a INR-denominated parking spot for your overseas wealth.
- NRO (Ordinary) Account: Designed strictly for managing your income earned within India. This includes rent from properties, dividends, pensions, or the sale proceeds of Indian real estate.
Structural Strategy Tip
Never instruct a tenant to deposit rent directly into your NRE account. The banking system will frequently reject the transfer, or worse, process it leading to a direct FEMA violation upon audit. Always route Indian income through the NRO channel.
Map your structural compliance flow2. Repatriability: The Crucial Difference
"Repatriability" refers to your ability to move the funds back out of India to your foreign residential country without seeking special RBI permission.
- NRE Accounts: Freely and fully repatriable. Both the principal deposited and the interest earned can be transferred back abroad at any time without limit or tax clearance certificates.
- NRO Accounts: Restricted repatriability. You can only repatriate up to USD 1 Million per financial year from an NRO account, and only after generating a Form 15CA/CB from a Chartered Accountant proving all Indian taxes are paid.
3. Taxability in India
The tax treatment of interest earned on these accounts is another major divergence:
NRE Interest: 100% Tax-Free in India. No TDS is deducted. (Note: You may still need to declare it in your host country depending on local tax laws).
NRO Interest: The interest earned is fully taxable. Banks will automatically deduct TDS at 30% (plus surcharge/cess) before crediting the interest. This can be mitigated if you reside in a country with a Double Taxation Avoidance Agreement (DTAA) with India.
4. Joint Holding Rules
If you plan to hold the account jointly with a relative, the rules dictate who that co-applicant can be:
- NRE Account: Can only be held jointly with another NRI/OCI. If held with a resident Indian relative, it can only be on a "Former or Survivor" basis, meaning the resident cannot operate the account while the primary holder is alive.
- NRO Account: Can be held jointly with another NRI, or with a Resident Indian relative on a "Former or Survivor" basis.
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Key Takeaways
- Foreign Income: Route to NRE. Tax-free and fully repatriable.
- Indian Income: Route to NRO. Taxable at 30% and repatriable up to $1M with a 15CB certificate.
- Holding a resident savings account as an NRI is illegal under FEMA.