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If you are moving abroad soon and aiming to attain NRI status, you should know that you cannot continue with your existing resident savings account. But what do you do with the money you have saved? Can it be converted into an NRE account? Or does it need to be an NRO account? Here are the answers.
The Reserve Bank of India (RBI) has allowed Non-Resident Indians (NRIs) to operate three (1) major kinds of bank accounts in India depending on their banking needs:
1) Non-Resident External (NRE) Account: An NRE account allows you to transfer your foreign earnings to India. This type of account is rupee-denominated, and the interest earned is completely tax-free. It can be opened in the form of current, savings, fixed or recurring deposits.
2) Non-Resident Ordinary (NRO) Account: An NRO account is opened for depositing earnings accruing or arising in India such as rental income, dividend, pension, etc. NRO accounts are also rupee-denominated and can be opened in the form of savings, current, recurring deposits or fixed deposits.
3) Foreign Currency Non-Resident (FCNR) Account: An FCNR account is essentially a term deposit account that allows you to earn tax-free interest on your investment. An FCNR account can be opened in currencies such as US Dollar, Canadian Dollar, Australian Dollar, Sterling Pound, Euro, Japanese Yen, Swiss Franc, Singapore Dollar and Hong Kong Dollar.
If your residential status has now changed to an NRI, it is mandatory for you to either close your resident savings account or redesignate it into an NRI account immediately. But that NRI account cannot be an NRE account.
This is because NRE accounts are designed to help you save your overseas income only. It is opened when an NRI wants to place foreign earnings in their home country.
Since the amount deposited in an NRE account is earned outside India, not only it is completely tax-free but both the principal and interest amount remain freely repatriable to your country of residence.
Your resident savings account, on the other hand, will hold deposits that are generated in India and would attract taxes as well. Therefore, a resident savings account cannot be converted into an NRE account.
The best option for newly turned NRIs is to convert their resident savings account into NRO accounts and transfer the deposits there.
Since NRO accounts are meant to park income accruing or arising from India, it can hold all your existing resident savings deposits.
However, remember that the interest earned on NRO (2) accounts is liable to tax deducted at source (TDS) at the rate of 30% plus surcharge and cess. Also, the amount of money that can be repatriated is restricted to up to USD 1 million per financial year (April- March).
Also, though it is not mandatory for you to open an NRO account, if you want to keep your local savings in your resident savings account in your name, it represents the only option.
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NRIs open a new NRE (3) account to transfer their overseas income to India smoothly while avoiding any tax liabilities at the same time.
You can use these funds to either make investments in India or for other financial commitments like managing family expenses or utility bills in your home country.
The biggest benefit is that an NRE account allows for full repatriation of funds to your country of residence as and when required. So, liquidity is never an issue.
There is a provision for a penalty if you continue to operate your resident savings account even after becoming an NRI.
According to the Foreign Exchange Management Act, 1999, the penalty for not converting a resident account to an NRO account is up to three times the amount involved in it, or Rs 2 lakh when the sum is not quantifiable.
Moreover, if the violation is a continuing one, you may have to pay an additional penalty as well. In such cases, the extra penalty (4) may extend up to Rs 5,000 for each day that the violation continues for. Therefore, it is advisable that you convert your resident savings account into an NRO account as soon as possible.
As an NRI, you cannot convert your resident savings account into an NRE account since the latter is meant only for depositing foreign income. But you can get it redesignated into an NRO account to manage your local savings and deposits in your name. Doing so also allows you to manage expenses that arise in India, while also allowing for easy money transfers to extended family and friends who may still be resident citizens.
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*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.
The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.