The rush to get Aadhaar linked to the bank accounts before the Supreme Court delayed its implementation, was an eye-opener to many non-resident Indians (NRIs) settled abroad. Emotions ranged from panic, as there were no plans to travel India and hence no way to get an Aadhaar, to the operational process for linking Aadhaar to bank accounts. We had a tough time explaining to NRIs that this does not apply to them at all. NRIs are not assumed to have an Aadhaar in the first place. After all, there is a declaration that must be signed to obtain an Aadhaar that you were resident in India for 182 days, in the previous 12 months or more, which would not be true for NRIs.
While this may look like an aberration, we find many NRIs, even though they have lived abroad for years, have questions on even the types of banking accounts that are allowed for them. This lack of knowledge is a continuous cause of stress for them and their family members, who assist them with their money management back home. Thus, here is a quick guide to your bank account options as an NRI.
NRO bank accounts:
Most NRIs, before they leave the nation, have already got resident bank accounts. While they tend to be rather busy with their farewell dinners and multiple shopping and preparation to move abroad, personal finances tend to take a backseat, as it is in the necessary but not urgent category.
Over a period of time, few of these bank accounts become dormant, or some continue to be worked as resident bank accounts. This is not authorized as NRIs cannot continue resident accounts. Their resident accounts require being converted to NRO accounts. Non-Resident Ordinary (NRO) accounts are rupee accounts that allow credits from all sources and are typically best used for money received locally like rentals or dividends. Money from an NRO account is non-repatriable in the normal course and is ideally used to support local spends. Interest earned on NRO accounts is subject to a tax deduction at source (TDS) of 31.2%. You can choose to have either NRO saving bank account for regular use, or an NRO fixed deposit in a situation when you are seeking to lock in your money for a longer time period at a better rate of return.
NRE bank accounts:
Repatriation of funds tends to be a crucial need for many NRIs, especially those who have decided to settle abroad or are likely to do so. Non-resident external (NRE) bank accounts are ideally suited for this purpose as they authorize outward remittances very efficiently. NRE accounts are denominated in rupees, though allow restricted sources of credit like overseas remittances or transfers from your NRE or foreign accounts.
Thus, while money in NRE accounts is exposed to currency risk as they are maintained in rupees, the account is flexible to convert to foreign currency whenever desired. Interest earned on NRE accounts is tax-free in India, though it may be taxable in the country in which the NRI lives. A lot of NRIs are unaware of this, as the bank they deal with is precisely referring to the tax-free nature of NRE interest from an Indian tax perspective, and not considering the cross-border tax implications of the same. NRE accounts can be both savings as well as fixed deposits account.
Foreign currency non-resident (FCNR) accounts:
These are fixed deposits maintained in foreign currencies including US dollar, euro, pound, Japanese yen, Canadian dollar, Australian dollar, among other currencies. The interest received on them is also in foreign currency and deposits are for time periods ranging 1 to 5 years. As these are maintained in foreign currency, there is no currency risk and funds are also simple to repatriate.
Resident foreign currency (RFC) account:
These bank accounts are typically used by returning Indians or NRIs to park their foreign currency when they move back after living abroad. Since the funds are held in a foreign currency, it is not exposed to international exchange risk. The capital held in these accounts can be converted back to NRE and FCNR accounts if the individual becomes an NRI once again. The interest earned is also fully repatriable.