NRI bank accounts: Which one is apt for you?

ndia has had a history of a healthy amount of NRI deposits maintained with Indian banks (the Indian exchange control regulations define an NRI as an Indian citizen who stays abroad for employment/ carrying on business or vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad).

As of November 2006, India had an NRI deposit balance of US $35.84 billion amounting to approximately 23% of India’s foreign exchange reserves.

It is worth examining the significant features of the bank accounts that can be opened by NRIs in India to assess which may be best suited to an individual’s specific needs. Today, NRIs can open the following types of bank accounts:

§ Non Resident Ordinary (NRO) Rupee Account

§ Non Resident External (NRE) Rupee Account

§ An account under the Foreign Currency Non Resident Account Bank Scheme (FCNRB Account)

NRO accounts

An NRO account is a ‘non-repatriable’ rupee account maintained by an NRI in India. Any NRI can open an NRO account with a bank for bona fide rupee transactions. The NRI would, however, need to submit an undertaking to the bank that all debits/ credits pertaining to investments shall be in accordance with Reserve Bank of India (RBI) guidelines. An NRO account can be in the form of current, savings, recurring accounts or fixed deposits.

An NRI can open an NRO account jointly with residents and a resident power of attorney holder can operate this account. Balances in NRO account are generally not eligible for remittance outside India without prior RBI approval.

However, balances representing sale of assets (including sale proceeds of immovable property) within an overall limit of USD 1 million per calendar year, are eligible for remittance under the automatic route. Current income (such as dividend, rent, etc), derived in India is also freely repatriable out of India. Local payments/ permitted investments from funds lying in the NRO account may also be made.

NRI account holders may approach banks for rupee loans against the security of fixed deposits where such loan is not for carrying on agricultural/ plantation activities or real estate business or for re-lending. On change of status of an NRI to resident Indian, the accounts must be converted to resident rupee account.

NRE accounts

An NRE account may be opened in the form of a current, savings, recurring account or fixed deposits by way of inward remittances of foreign exchange funds. Unlike an NRO account, balances in an NRE account are freely repatriable outside India.

The NRI is required to furnish an undertaking that he shall intimate the bank as regards his return to India for permanent residence at the time of opening the NRE account and the account cannot be opened jointly with residents.

However, a resident power of attorney holder can operate the account for local payments, for remittances to the account holder and for facilitating investments.

NRIs are entitled to the following benefits in respect of the NRE accounts held by them in India:

§ Term deposit for one year and above carry a higher rate of interest than those available to resident Indian and such interest is exempt from tax in India. The balance available in such accounts is free from wealth tax.

§ The entire credit balance in the NRE account (along with interest earned thereon) is freely repatriable.

§ Purchase and sale of units of mutual funds, central and state government securities and national saving certificate can be made without reference to RBI.

An account holder can avail of loan/ overdraft facility from his bank against the security of fixed deposit out of their NRE accounts for personal/ business purposes but not for re-lending and carrying on agricultural/ plantation activities or real estate business.

The funds so obtained can also be utilised for investments in India on non-repatriable basis, in certain specified areas and for the acquisition of flats/ houses subject to prescribed conditions.

The loan can be repaid out of local rupee resources in the NRO account of the borrower. The NRI depositor, subject to certain conditions, may also pledge his deposits to enable third party resident individual/ firm/ company attain fund/ non-fund based facilities.

NRE accounts are maintained in Indian rupees, any debit or credit of foreign exchange needs to be converted to Indian rupees at fluctuating TT buying / selling rates, at cost/ loss, if any, to the account holder; the amount lying in such account is subject to exchange fluctuation risk.

NRIs are, however, permitted to enter into forward contracts to hedge risk of foreign currency fluctuations in respect of amounts held in the NRE accounts.

On change of status of an NRI to resident Indian, the accounts must be converted to resident rupee account.

FCNRB accounts

Under this scheme, only term deposit accounts can be opened, for a period ranging from one year to three years.

FCNRB accounts can only be opened and maintained in designated currencies, ie Pound Sterling, US Dollar, Deutsche Mark, Japanese Yen, Euro, etc. Apart from inward remittances through normal banking channels, this account can also be opened by transfer of funds from existing NRE / FCNRB accounts.

If the depositor proposes to place a deposit in other than designated currency, then the depositor can undertake a fully covered swap with the bank against the desired designated currency.

All permissible debits/ credits as applicable to the NRE accounts, equally apply to accounts opened under this scheme. While there are no restrictions on the repatriability of funds lying in FCNRB account, in order to discourage premature withdrawal of FCNRB term deposits, a penalty is levied in the form of reduction of interest rate by 1% for the period the deposit is maintained and no interest is provided if the deposit is kept for less than six months.

The regulations as regards loans/ overdrafts/ change of residential status/ joint account holders applicable to the NRE account holders, apply mutatis mutandis to FCNRB deposits.

Nomination facility

A nomination facility is also available to holders of NRO, NRE and FCNRB accounts. However, for deposits held in NRE/ FCNRB accounts, the deceased account holders’ nominees (who could also be residents in India) would not be automatically entitled to the right of repatriation of funds acquired by them.

Similarly, credit of the amount becoming payable to a nominee to his NRE/ FCNRB account requires RBI approval. In such cases, the nominees are required to make separate applications to RBI, which would be considered in the light of the residential status of individual nominees and the relevant exchange control regulations. Utilisation of the funds in India by the nominees would not, however, need prior approval.

Depending on his specific circumstances, an NRI can maintain both rupee accounts as well as designated currency accounts with banks in India. A careful survey of the options available will result in an NRI being able to select the type of account best suited to his needs.