NRE and NRO bank accounts —
differences and use.

NRE account

An NRE account is maintained in Indian rupees, but it is funded from abroad and its balance is freely repatriable. Money deposited into an NRE account is converted into Indian rupees and held in the account. When the account holder withdraws money and wishes to have it sent abroad, the rupee amount withdrawn is converted back into the foreign currency and remitted.

The principal features of an NRE account are:

• Free repatriation. Money in an NRE account can be repatriated abroad by the account holder, without the restrictions that apply to an NRO account.
• Tax treatment. No income tax is payable on the income earned by way of interest on an NRE account. No TDS is deducted by the bank. While NRE account earnings are not taxable in India, they may be taxable in the foreign country in which the account holder is resident.
• Joint holding. An NRE account cannot be held jointly with an Indian resident. It can be held jointly with another NRI only.

NRO account

An NRO account is also maintained in Indian rupees, but it is designed for income earned in India — rent from an Indian property, dividends, pension, proceeds of a sale, or any other rupee income. The principal features are:

• Repatriation is not freely allowed. Money in an NRO account is not ordinarily repatriable. Repatriation is permitted only in the circumstances and to the extent described below.
• Tax treatment. Interest earned on an NRO account is taxable in India, and may also be taxable in the foreign country in which the account holder is resident. TDS is deducted by the bank.
• Joint holding. An NRO account can be held jointly with an Indian resident.

Repatriation from an NRO account

The Government of India permits a Non-Resident to repatriate up to one million US dollars per calendar year from an NRO account, subject to the payment of all applicable taxes.

The one-million-dollar limit is a combined limit. It includes any money received by the NRI or PIO from the sale of their properties in India — provided that the property has been held for a period of ten years or more.

Where the property has been held for less than ten years, the position is different. Repatriation is not foreclosed; it is deferred. The money received from the sale of the property must be deposited in an NRO account, and the money can be repatriated once the period for which the property was held, plus the period for which the money has been in the NRO account, adds up to ten years.

The rule is best explained by an example. If a property was purchased and sold after seven years of ownership, the proceeds must be deposited in an NRO account for a further three years. Once the three years have elapsed — completing the ten-year requirement — repatriation can be made.

FCNR accounts — and how they differ from NRE

NRE and NRO accounts are held in Indian rupees. An NRI or PIO who wishes to hold the balance in foreign currency can, instead, open an FCNR (Foreign Currency Non-Resident) account. FCNR accounts can be held in US dollars, pounds sterling, euros, Japanese yen, Australian dollars, or Canadian dollars.

The difference between an NRE account and an FCNR account is not merely the currency. The two accounts are structured differently:

• Term. FCNR accounts must be held as fixed deposits — term deposits. NRE accounts (and NRO accounts) can be in the form of current or savings accounts, with the freedom to deposit and withdraw at will.
• Period. FCNR deposits must be for a fixed period, ordinarily between one and five years. NRE and NRO accounts have no such term restriction.
• Treatment on return to India. Where an NRI or PIO returns to India, FCNR deposits are not re-designated. They continue to be treated as FCNR deposits until maturity. This is a material difference from the treatment of NRE and NRO accounts on return.

Returning to India — what happens to the accounts

An NRI or PIO who returns to India and holds NRE or NRO bank accounts is required to notify the bank of their return. The bank will, in such a case, re-designate the NRE and NRO accounts as resident accounts.

Where the account holder has fixed deposits in the NRE or NRO account, and those deposits are held until maturity, the deposits continue to receive the benefit of the rate of interest that was set before the account holder's return to India. This ensures that no loss of interest is incurred when the accounts are re-designated.

The position on FCNR deposits, as noted above, is different: FCNR deposits are not re-designated, and continue to be treated as FCNR deposits until maturity.

Types of banks in India

For an NRI opening an account in India, the choice of bank is a practical decision as well as a legal one. The categories of banks operating in India are:

• Public sector banks. Banks in which the Government of India holds a majority stake. These include the State Bank of India and its subsidiaries, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India, Bank of India, Indian Bank, and others.
• Private sector banks. Banks incorporated under the Companies Act and licensed by the Reserve Bank of India.
• Co-operative banks. Banks organised on a co-operative basis, with a more local or community-oriented focus.
• Foreign banks. Branches or subsidiaries of banks incorporated outside India, operating in India under a licence from the Reserve Bank of India.

Each category has its own characteristics in terms of service, reach, and the ease with which an NRI can operate the account from abroad. The account-opening requirements are set by the Reserve Bank of India and apply to all categories.

Where the difficulty usually arises

In our experience with NRI banking matters, the points that most often cause difficulty are these:

• Choosing the wrong account type. An NRI depositing the proceeds of an Indian property sale into an NRE account, or an NRI seeking to repatriate funds held in an NRO account without appreciating the one-million-dollar annual limit and the ten-year rule for property sale proceeds.
• Joint holding. An NRE account opened jointly with a resident Indian, in the belief that this is permitted. It is not. Joint holding with a resident is permitted only in an NRO account.
• Taxation of NRO interest. An NRI assuming that NRO interest is not taxable in India, or that TDS will not be deducted, as would be the case for an NRE account. The position is the opposite.
• The ten-year rule. An NRI who sells an Indian property after a short holding period, and expects to repatriate the proceeds immediately. The proceeds must first be deposited in an NRO account for the balance of the ten-year period.
• Re-designation on return. An NRI returning to India without notifying the bank, and continuing to operate the accounts as NRE or NRO accounts after they should have been re-designated.
• FCNR on return. An NRI returning to India and assuming that FCNR deposits will be re-designated in the same way as NRE and NRO accounts. They are not — FCNR deposits continue to be treated as FCNR deposits until maturity.
• Coordination with foreign tax position. An NRI assuming that because NRE interest is not taxable in India, it is not taxable anywhere. NRE interest may be taxable in the country in which the account holder is resident, and the position in that country should be checked separately.

How Kavao Law can assist

We advise NRIs, foreign nationals, and their families on banking, taxation, and repatriation matters connected with India. Our work typically includes:

• Advising on the appropriate account type — NRE, NRO, or FCNR — for the funds the client holds or expects to receive.
• Advising on the repatriation rules, including the one-million-dollar annual limit and the ten-year rule for property sale proceeds.
• Advising on the tax treatment of interest on NRE, NRO, and FCNR accounts, and on the interaction with the client's tax position in the country of residence.
• Advising on the joint-holding rules, and on the design of accounts where the client wishes to provide for a family member in India.
• Advising on the re-designation of accounts on return to India, and on the treatment of fixed deposits and FCNR deposits.
• Assisting with the documentation required by the bank for opening or re-designating an account, including the KYC requirements and the Power of Attorney arrangements where the client wishes another person to operate the account.
• Advising on the use of banking channels for the purchase or sale of Indian property, and on the documentation required to establish the source of funds.

For more on our work in this area, see our Property & Land Records practice-area page and our note on buying property in India.

A closing note

The information in this article is general in nature and is intended to give NRIs and PIOs a clearer sense of the banking arrangements available in India, and of the practical consequences of the choice between them. The rules on repatriation are set by the Reserve Bank of India under the Foreign Exchange Management Act, 1999, and may be revised from time to time.

The distinction between an NRE account and an NRO account is not a matter of preference — it determines whether the money can be repatriated freely, whether the interest is taxable in India, and whether the account can be held jointly with a resident. Where the funds are significant, or where a property sale is involved, the account structure should be settled before the funds are received, not afterwards.