NRE account: Eligibility to open, uses, transferability, income tax on interest

As many Indian citizens are migrating from India either for studies or for taking up an employment it is important for them and their family members here in India to know about various bank accounts a person who has become a non-resident under FEMA (Foreign Exchange Management Act) can open here in India. 

Who can open this account and currencies in which this account can be opened

An NRE account can only be opened by  a person of Indian Origin or a person who has become a non resident under FEMA.  Both category of person are referred to as NRI for further discussion. Unlike an NRO account which can come into existence after you inform your bank about you having become a non-resident and your bank designates your existing bank account as NRO account, the NRE account can only be opened afresh  after you have become an NRI under FEMA. The NRE account can only be opened by an NRI personally and not by a power of attorney holder. One can maintain more than one NRE accounts in India. An NRE account/s can be jointly opened with any other NRIs but not with any other resident. Moreover a person of Pakistani or Bangladeshi citizenship cannot open the NRE account.

Money between various NRE accounts can be freely transferred without any limit. An NRE account can be had either as a Saving bank, Current Account, Fixed Deposits, or recurring deposit etc.  An NRE account can be opened only in Indian Rupees and no other currencies. 

Please note that once you come back to India for good, you need to intimate the bank and the bank will designate your existing NRE accounts as resident accounts and the banking and taxation provisions apply accordingly.

What can be credited in the NRE account and what debits are allowed therefrom 

An NRE account, for all practical purposes, is treated as your bank account maintained in a foreign country so money lying in this account can freely be remitted outside India without any restrictions. Since amounts lying in your NRE account can be freely remitted outside India without any limit, the RBI permits only limited credits in these accounts. All the money remitted from outside India in any permitted currency can be freely credited in the NRE account. Likewise any amount realised on cheque drawn on your account in foreign currency can also be freely credited. Moreover proceeds of any draft or traveller cheques issued outside India can also be also credited to the NRE account.

You can also credit all the income as well as the sale proceeds of the investments made in India whether in government securities or in shares/bonds of Indian Companies, which were made on repatriation basis. Under repatriation facility you are allowed to send back the sale/redemption proceeds of money invested in India and income on such investments. The investments on repatriation basis can only be made from an NRE or FCNR (Foreign Currency Non Resident)   account or by direct remittances from outside India. 

You can also tender any foreign currency, during your visit to India, which was brought by you and as declared on the foreign currency declaration form while landing in India as long as you are a non resident under FEMA.  

Debits from an NRE account are allowed for making investments in India either on repatriation basis or on non-repatriation basis. Money lying to the credit in this account can also be remitted back outside India freely as well can be used for local payments. This account can also be used for payment of EMI of home loans in India. Loans can also be obtained against security of balance in these accounts in India as well as outside India.

Transfer between NRO and NRE Account

Balance lying the your NRE account be freely transferred to your NRO account but for transferring money from NRO account to NRE account you need to pay the applicable taxes on money to be transferred if applicable and follow the prescribed procedure including a certificate from Chartered Accountant. It is important to understand that once the money is transferred from NRE account to NRO account, it loses its distinct character and cannot again be freely transferred to NRE account. So think twice before you transfer your money from NRE account to NRO account.

Taxation of interest on NRE account

Any interest on the NRE account is fully exempt under Section 10(4)(ii) of the Income Tax Act without any limit. Since the interest on such deposits is fully exempt the bank will not deduct any tax on such interest at source. However the interest on NRE account will become fully taxable once you become a resident under the FEMA. 

Balwant Jain is a tax and investments expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.