I Mrs. Latha Mukund am the author of the book titled “Fundamentals of Finance” wherein I have covered the basic topics of Finance for the investors to have a proper understanding of how to save, invest and manage one’s finances in a prudent manner. In this article let us discuss the facts related to NRIs, different types of bank accounts available for them along with their features and benefits, and also the tax implications associated with them.
First of all, let’s understand who can be called as an NRI. An NRI is a NON RESIDENT INDIAN. In simple terms, an Indian citizen residing outside India for a period of at least 182 days in a financial year is considered to be an NRI.ie his residential status is determined by his stay in India. As per the recent amendment of Finance Bill 2020 an Indian citizen whose total income other than the income from foreign sources exceeds 15 lakhs during the previous year, the period of 182 days stands reduced to 120 days. Further, he needs to check whether his stay in India is 365 days or more in the immediately preceding 4 Financial years. For eg., An NRI visits India in FY 20-21 and stays for 150 days. Further during the preceding 4 financial years (FY2019-20, 2018-19, 2017-18, 2016-17), he was in India for a total of 380 days, in such a case he will be treated as a resident for income tax purposes.
NRIs are subject to FEMA guidelines. FEMA stands for FOREIGN EXCHANGE MANAGEMENT ACT.
As per these guidelines let us take a look at the various types of bank accounts available to them, their features, benefits along with the taxation aspect.
Types of Bank Accounts for NRI
1. NRE account (Non-Resident External Account)
This is a rupee-denominated account opened by an NRI to facilitate the deposit of foreign currency earnings. The benefit is that it has high liquidity and the amount is fully repatriable to the country of residence. It can be a savings account, Current account or a Term deposit account. The account can be held jointly only with an another NRI.
Benefits and Features:
- This account can be used for both investment and business purposes.
- Interest earned on NRE account is tax-free in India but it can be taxable in the country of residency. The entire amount is fully repatriable.
- The account can be opened in any of the banks after complying with your KYC formalities. You need not be physically present in India, a letter in the form of an Email to the bank would suffice.
- This account is subject to risks arising from currency or exchange rate fluctuations.
- An NRE account allows you to transfer funds to another NRE account or to an NRO account.
- Withdrawals are made in Indian Rupees.
NRE FDs: Interest earned is tax-free in India but can be taxed In the country of residency. FD account can be continued in the same state till maturity irrespective of your status. Money is fully repatriable. Interest will be the applicable FD rate. The account can be held jointly only with an NRI. The disadvantage is that this account is open to exchange rate fluctuation risks.
NRE FD on returning to India: This account can be continued till maturity after an NRI changes his status to local resident. Any premature withdrawal will attract penalty. This FD can be converted in to a RFC account after maturity. RFC account is discussed below…
2. NRO ACCOUNT (NON RESIDENT ORDINARY ACCOUNT )
These are rupee accounts like Current, Savings, or Fixed Deposit accounts. This account helps you to maintain your transactions in India like rental income, Fixed Deposit account, Savings Bank interest, dividends from shares, mutual funds, etc. The above incomes earned in India while you are abroad will be credited to your NRO account.
Benefits & features:
- This account can be held jointly with an Indian Resident or a Non Resident.
- Money upto the extent of USD1 million in the NRO account can be repatriated after paying taxes on your income in India.
- On change in your status from Resident to Non Resident your existing Savings Account needs to be converted in to an NRO account after complying with the KYC formalities.
NRO FDs: Interest earned is taxable. This account is used for investing the money earned in India and to hold the account jointly with a Resident Indian. Also, the funds from an NRE account can be used to open an NRO FD.
NRO FD on returning to India: This will have to be converted to Resident accounts.
This is FOREIGN CURRENCY NON RESIDENT ACCOUNT and can be held in the form of term deposits ranging from 1 year to 5years. The Account can be maintained in designated foreign currencies such as Australian Dollar, Canadian Dollar, Euro, Japanese Yen, UKPound, USDollar. The interest and principal are tax-free and fully repatriable. There is no currency risk as deposits are maintained in Foreign currency itself. This account cannot be held jointly with a Resident Indian but only with a Non Resident. Any deposit in this account can continue till maturity in case of a status change from Non Resident to Resident Indian. This Account earns lower interest rates in comparison with NRE account interest rates
4. RFC Account
This stands for Resident Foreign Currency Account. On an NRI returning back to India, the FCNR account gets re-designated to Resident Foreign Currency account. This account will be useful for those NRIs who are having foreign income abroad even after returning back to India and at any point of time in future would like to take that money abroad or use that money to sponsor their kid’s foreign education. The account can be held jointly with any returning NRI or a Resident Indian that includes close family members like son, daughter, spouse, parents, daughter in law, sister in law or brother in law. The money earned in foreign currency could be pension income, dividend income, or any sale of assets. Money from an NRE account or FCNR account can be transferred to this RFC account on returning back to India. In case of death of the NRI account holder the amount lying in the account can be transferred to the nominee without any charges and tax liability.
To summarize, the above NRE account is suitable for those who wish to invest their foreign income in India; NRO account for those who are having income and investments in India; FCNR is suitable for those who wish to manage their investments & expenses outside India.
Hence it depends upon the investor to decide on the type of account to be maintained as each one has got their own benefits.
NRIs can open more than one NRE, one NRO, or FCNR accounts with different banks in India. They can also hold multiple accounts with the same bank but the account type should be different.
Can NRIs continue with Resident Savings Account?
As per the FEMA regulations it is illegal for NRIs to continue with their existing savings account in India. On change of status from Resident Indian to a Non Resident the existing Savings account will have to be converted into an NRO account. This process needs to be completed within three months of change of status by informing the Bank of the same. Any income earned in India such as dividend income, professional fees, salary income, rental income, interest income will be credited to the NRO Account. Any contributions towards premium for Life Insurance policies or mediclaim policies, PPF account (if opened prior to becoming an NRI), purchase of property can be routed through this account. In case of any transfer of money from India to the country of residency an NRI needs to fill up & submit form 15A & 15B to the bank.
An NRI Account needs to be opened if there are any foreign remittances that can be repatriated back to the country of residence.
Are NRIs allowed to invest in Small Savings Schemes?
NRIs are not allowed to invest in Small Savings Schemes such as Time deposits, Recurring deposits, Monthly income schemes, PPF, NSC offered by Post office, reason being all others except PPF attract tax whereas in case of NRE FD they can get tax free income. Moreover, the rate of interest is much higher. There are other avenues available for NRIs such as Tax savings bonds, IPOS, Mutual funds, Real estate.
Are NRIs allowed to invest in Real Estate in India?
As per FEMA regulations NRIs are allowed to invest either in a commercial property or in a residential property but cannot invest in agricultural land or farm house in India. Remittances can be made through an NRO/NRE/FCNR accounts. They can also avail of a home loan and the amount can be serviced through any of those accounts mentioned above. The property can be held in single name or in a joint name with an NRI. Also a property can be inherited from their family members residing in India. The tax benefits relevant to purchase of property are similar to that of a local resident.
Sale proceeds arising from transfer of property is characterized as short term /Long term depending upon the holding period. A property held for less than 24 months is treated as short term and will be taxed as short term capital gains whereas in case of a property held for more than 24 months will be treated as Long term and will be subject to long term capital gains.
The buyer will deduct TDS at time of buying the property and deposit the same with the government. In case of short term capital gains there will be a TDS of30%(surcharge plus education cess) and 20% (surcharge plus education cess) in case of long term capital gains. It is mandatory for the buyer to obtain a Tax deduction & Collection Account no known as TAN from the assessing officer. The info about the rate of TDS deducted will have to mentioned in the sale deed. Also the buyer has to issue form16A to the seller after filing the TDS return.
Capital gains arising from sale of property can be reinvested in buying another property within two years of sale or construct a property within three years of sale to reduce capital gains tax.
Alternatively, the gains can be reinvested in Capital Gains Bonds under sec 54EC within 6months from the date of sale.
NRIs can avail of indexation benefit in case of sale of property to reduce their tax liabilities.
Repatriation of sales proceeds: To repatriate the proceeds from sale of property from an NRO account form 15CA & 15CB has to be submitted to the bank. The amount upto 1million USD can be repatriated outside India.
An NRI can rent out his property and the rental income can be credited to the NRO account. The tenant will deduct TDS @30% plus health & education cess and credit the net amount to the NRO account of the NRI. As per the laws the tenant should obtain a TAN from the assessing officer.
TDS for NRIs
Any income earned in India by an NRI will be liable to tax if the total income in any financial year exceeds 2. 5lacs. The following are the different types of income that are subject to TDS are:
- Interest income earned on Bank Fixed Deposit.:
- Rental income earned on any property invested in India.
- Payment received for any services rendered in India or any salary income earned in India.
- Gains earned on sale of Mutual Funds/Bonds & Shares.
- Sale of property owned in India.
All the above mentioned income should be credited to the NRO Account.
- TDS on NRO FD: 30%
- TDS on Dividend : 20%
- TDS on capital gains: shares/ Equity MFS below 1 year is 15% and more than 1 year is 10%. And in case of Debt mutual funds it is 30% for less than 3years and for more than 3years it is 20% .
- TDS on rental income: 30%
- TDS on sale of property: in case the property is held for less than 24months there will be a TDS of 30% whereas for a property held for more than 24 months there will be a TDS of 20%
- TDS on other incomes such as royalty, professional fees, and technical fees is 10%.
- ITDS on corporate bonds/debentures :20%
All of the above includes health & education cess.
Can NRIs invest in shares in India?
NRIs can trade in shares through stock exchanges under the portfolio investment scheme on a repatriation or non repatriation basis. PIS is a scheme of RBI wherein RBI has authorized few branches of each authorized dealer banks to deal in this scheme on behalf of NRIS. NRIs can approach any one of those banks and route their sale/purchase transactions through them. Two separate trading accounts can be opened based on NRE /NRO. NRIs are not allowed to do intra-day trading. NRIs are also eligible for bonus/rights issue subject to certain conditions.
In case of any change in status the NRIs wil have to inform those authorized banks through whom they have routed their investments and also the DP with whom they have opened a demat account. Subsequently a new DP account will be opened with the new status and the old account to be closed.
Can NRIS invest in Mutual Funds in India?
NRis can invest in mutual funds subject to certain regulations as per FEMA. First of all an NRE/NRO account needs to be opened after complying with certain KYC formalities.The investments can be made on either a repatriable or non repatriable basis respectively. Also the recently introduced FATCA in the year 2016 has to be filled in. On redemption of units TDS will be deducted on the capital gains made from the investment. The gains will be classified as short term or long term depending upon the holding period
In case of Equity mutual funds wherein the units are held for less than a year it will be treated as short term capital gains and there will be a TDS of 15% and incase the units are held for more than a year it will be treated as long term capital gains and TDS will be deducted at 10% .
In case of Debt mutual funds wherein the units are held for less than 3years it will be treated as short term gains and TDS will be deducted at 30% and incase units are held for more than 3years TDS will be deducted at 20%.NRIs can avail of indexation benefit to reduce their tax liabilities.
Power of Attorney (POA):
Mutual funds allow a POA to take decisions on behalf of an NRI pertaining to investments. The POA should have the signatures of both NRI & POA holder.
An NRI can nominate a Resident Indian in Mutual funds. An NRI can also be a nominee for investments made by a Resident Indian and can also be a joint holder with a Resident Indian or an NRI.
Every NRI must file tax returns in India if their income earned in India exceeds 2.5 lacs in a financial year. NRIs can claim deduction under sec 80© upto 1.5 lacs for premiums paid towards life insurance polices, children’s tuition fees, PPF (if opened prior to becoming an NRI & is continuing), ELSS in mutual funds, principal repayment of home loans, stamp duty & registration charges incurred, .Deductions under sec80(d) for payment of premium towards mediclaim for spouse, children & parents.
Deductions under sec 80(e) for interest on any education loan availed. Sec 80(G) for any donations towards charity. Deductions under sec 80TTA can be claimed for income earned from Savings bank account ,Post office Savings account up to a maximum ofRs.10000/.
Under Sec 24 NRIs can get tax exemptions on interest paid towards home loans for a maximum of upto 2 Lacs in case of self-occupied property. In case of let out property the entire interest amount can be claimed as a deduction. In case of any joint loan taken with either an NRI or a Resident Indian then each member can avail of tax benefits separately.
TAX SLABS for NRIs:
Upto 2.5 lacs…NIL
2.5 lacs -5lacs… 5%
Above 10lacs …30%
Any income earned outside India known as global income is not liable to tax in India for an NRI.
Double taxation: In order to avoid double taxation India has signed a bilateral DTAA..DOUBLE TAXATION AVOIDANCE AGREEMENT with over 80 countries. eg. Singapore, Australia, New Zealand, USA, UK, Canada etc. under this the NRI tax relief can be claimed using either of the two ways viz:
- Tax credit method: under this the NRIs can get tax relief in their country of residence.
- Tax exemption method: Here the tax is paid only in one country, either in country of residency or in India.
In order to avoid double taxation they must ensure that they have the necessary proof of residence and taxes paid.
Can NRIs buy mediclaim policy in India?
An NRI is eligible to buy a health insurance policy in India and will need to submit proof of residence, ITR & other related documents. Also there is a clause of Geographical restrictions stated in the policy which means the insurer will not cover any medical expenses incurred outside India .For eg..if an individual resides in the USA & has to undergo medical treatment the medical expenses will not be reimbursed. But of late there are certain insurers which cover medical expenses incurred outside for some specified critical illnesses.
AN NRI can buy health insurance plans for their parents, spouses, children living in India and the premium paid can be claimed under sec80(D) for self, spouse & children up to Rs. 25000/. An additional Rs.25000/ can be claimed if the parents are below 60 years of age and an amount of Rs.50000/- wherein the parents are above 60 years of age. In case you are migrating abroad and are planning to return back after a certain period it is wiser to continue the mediclaim plan bought in India if any else it is better to discontinue the one bought in India and buy a health insurance plan overseas.
An NRI needs to understand the terms & conditions stated in the policy before taking any decision.
Nomination: An NRI can nominate any resident Indian or an NRI in all of the above.