Avoid common mistakes that people make with NRI transactions

Assume Mr A is an NRI based in the US and his father wants to send him ₹10 lakh from India. A resident Indian can only send money to an NRI's NRO account. It cannot go in the NRE account because even though NRE is a rupee-denominated account, funds deposited in it must originate from foreign sources. The transaction will fail if you send money to an NRE account from India.

Sending money to an NRO account is simple, but the purpose of transfer holds the key to getting it right. Some transactions may fall under the Liberalised Remittance Scheme (LRS).

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"A resident individual can transfer INR funds into an NRO account online – subject to the maximum INR transfer limit set in your netbanking – or offline. However, if a resident indian who is a close relative (as defined in Section 6 of the Companies Act, 2013) sends some money to an NRI as a gift or loan, it falls under that person's annual LRS limit," said a senior banking executive who is not authorised to talk to media.

It means Mr. A's father will have to declare that ₹10 lakh transfer to his son is not breaching his annual LRS limit.

However, if a resident Indian sends rental income, buys a property or pays off a loan to an NRI, it will not be an LRS transaction.

Keeping the transfer within the annual LRS limit is not enough. All LRS transactions above ₹7 lakh attract tax collected at source (TCS) at 0.5% to 20% depending on the purpose of the transfer. This means if Mr A's father transfers ₹10 lakh to his son's NRO account, the bank should apply 20% TCS on ₹3 lakh.

"It would be the responsibility of the resident donor to ensure that the gift amount being remitted is under the LRS and all the remittances made by the donor during the financial year including the gift amount have not exceeded the limit prescribed under the LRS," read the RBI notification.

Transferring funds from NRO to NRE/foreign bank

Say Mr A has a large sum in his NRO account that would earn him interest income of ₹1 lakh a year. He will only receive ₹70,000, as the bank will deduct ₹30,000 as tax deducted at source (TDS). Banks are expected to deduct TDS on the interest earned from an NRO account at a rate of 30%, plus any applicable cess and surcharge.

Moreover, withdrawals from NRO accounts are restrictive. "Most NRIs have the misconception that only $1 million per financial year can be repatriated. While this is true, some funds can be repatriated fully," said the banking executive.

"There could be two types of funds in an NRO account – current income and capital receipts. Any periodic income such as interest income, rent, pension, salary or dividend is called current income. Everything else (mostly lumpsum) is capital receipts. Current income can be repatriated without any limit (subject to producing the appropriate certificate from a chartered accountant), while capital receipts have a limit of $1 million per financial year," the executive added.

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The TDS and restrictions on withdrawals are two major reasons why having an NRE account for an NRI is important. "Most NRIs open an NRO account. Even if they have an NRE account, they do not use it often. I tell all my clients to keep transferring funds from their NRO to NRE account in batches. Everything that an NRO account does is possible via an NRE account. It’s better to hold large sums of money in NRE," said the executive.

To transfer funds from NRO to NRE account or to a foreign account, NRIs need documentary proof of the source of funds being used for repatriation. They need to fill in Form 15CA. Some transactions require Form 15CB and CA certificate. “In many cases, only 15CA is needed. If 15CA Part A, B or D is provided, it does not require Form 15CB or CA certificate. Form 15 CB is required only in case of Form 15CA Part C. Some banks allow repatriation for multiple purposes including family maintenance where they don't collect these certificates. But a CA letter is asked for," said the executive.

NRO versus NRE

Dipen Shah, co-founder of NRI FinOne, has a client in Tanzania. He was in the process of buying an insurance policy from an Indian insurer for which he had to make payments from his NRE account. "My client made a mistake and transferred money from his foreign bank account to the NRO account. The payment to the insurance company could not be made. He had to follow a cumbersome process of transferring funds from NRO to NRE account," said Shah.

Shah added that if NRIs want to invest, spend and keep their funds in India and don't want to repatriate back to the source country, they should transfer the funds directly to their NRO account. In other cases, they should use an NRE account.

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While transferring money from NRO to NRE is advisable, the reverse should be avoided. "NRE funds are fully repatriable. Why restrict your money by moving it to the NRO account? Make sure that you get inward remittances in the NRE account, not NRO," said the senior banking official cited above.

Another misconception is about debit cards. People tend to believe that the debit card that comes with the NRO account can be used abroad. This is not the case." As per RBI, international debit cards are given only with NRE accounts, and can be used abroad. NRO account holders receive Rupay or domestic cards," the banking official added.

Sending money to relatives in India

This can be done via banks, exchange houses or fintech platforms. "Funds can be sent via wire/telegraphic/SWIFT transfer from a foreign bank account, through an exchange house, or using online platforms like Remitly, Xoom, and Western Union to an Indian bank account," said Ruhi Mahajan, an ex-banker and a freelance BFSI trainer.

What are the charges? "Indian banks typically do not charge for inward remittances, foreign banks or platforms may have fees. If currency conversion occurs in India, GST may apply, ranging from 0.18% to 0.018% of the amount of currency exchanged," said Mahajan.

Foreign banks, exchange houses, or fintech platforms may offer more favourable conversion rates. "In that case, convert funds abroad and remit INR directly to an NRE account or the resident relative's account," said Mahajan.

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She suggested that if the conversion is done in India, it is better to transfer funds to an NRE account and use netbanking to transfer to the relative’s resident account. "Making a resident relative a mandate holder on the NRE account can simplify the access in India. Preferential conversion rates are often available in NRE accounts, making this a cost-effective option," said Mahajan. A mandate holder is a person who is authorised to operate a bank account on behalf of the account holder.