Choosing NRI deposit scheme: Consider income source, remittance needs

The Reserve Bank of India (RBI) data reveals that overseas Indians deposited $4 billion in non-resident Indian (NRI) deposit schemes between April and June of 2024-25, a 79 per cent increase over the previous year. These schemes include non-resident ordinary (NRO) deposits, non-resident external (NRE) deposits, and foreign currency non-resident (FCNR) deposits.

"Despite rising inflows, many NRIs lack awareness about NRO and NRE accounts and mistakenly use family accounts or invest in a relative's name. Many are unaware of tax implications," says Dipen Shah, certified financial planner, founder, NRI FinOne.

NRO account

An NRO account is used to deposit earnings from Indian sources, such as dividends, stock returns, pensions, and rentals. Interest from NRO accounts is fully taxable in India at applicable rates, including surcharges and cess. “Taxes paid in India can be credited under the tax treaty with the individual’s country of residence,” says S R Patnaik, partner (head-taxation), Cyril Amarchand Mangaldas.

 

RBI regulations limit repatriation from NRO accounts.

NRE account

NRE accounts allow NRIs to manage foreign income with seamless transfers to India. The interest income is tax-exempt in India.

“This makes it an attractive option for NRIs to park money tax-free in India. Funds, including interest, can be freely repatriated to the NRI’s residence country,” says Ritika Nayyar, partner, Singhania & Co.

FCNR account

This account allows NRIs to hold deposits in foreign currency, safeguarding them against exchange-rate fluctuations. It is ideal for those wanting to hold savings in a stable currency while earning interest. “Interest on FCNR deposits is also tax-free in India. This, along with currency risk protection, makes them a smart choice for NRIs wanting to diversify investments and reduce tax liabilities,” says Pallav Pradyumn Narang, partner, CNK.

Adhere to tax norms

Many NRIs think that money deposited in NRE or FCNR accounts is automatically tax-exempt. “While interest from these accounts is tax-free, the source of the deposited funds matters. Funds from taxable sources, like income or capital gains in India, may be taxed,” says Narang.

Many NRIs overlook the benefits of the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence. As a result, says Narang, they face double taxation on the same income.

Points NRIs must pay heed to

Patnaik recommends promptly notifying the bank of any change in residential status when moving out of India. He also stresses the importance of evaluating income sources and carefully selecting the most suitable account type for individual needs.

Be aware of the rules regarding joint holdings. “Unlike NRE and FCNR accounts, which permit only non-resident joint holders, NRO accounts can be held with residents as well,” says Patnaik.

Shah notes that many individuals choose banks for NRI accounts based on personal or family connections, often neglecting crucial factors like remittance frequency and fees, which can lead to higher costs. He emphasises the need for careful selection to ensure the bank meets specific financial and remittance needs.

Compare interest rates on these accounts at bank websites.

“NRIs planning to return to India should consider opening a Resident Foreign Currency (RFC) account,” says Jinal Mehta, founder, Beyond Learning Finance.

NRIs favour real estate and deposits. Roshni Nayak, founder-GoalBridge, Sebi registered investment advisor and ARIA member, observes that they sometimes neglect asset allocation and diversification, leading to underinvestment in important asset classes like fixed income and equity.

 

Key tax considerations for NRI deposit holders

 

Residency status: Tax treatment depends on residency status; changing from NRI to resident status affects taxation, so review residency status annually
 

Income tax: Interest from NRE and FCNR accounts is tax-exempt, but income like rent, dividends, or business profits earned in India is subject to tax
 

Double taxation: NRE and FCNR interest is tax-free in India, but NRIs should check for tax liabilities in their home country; double taxation treaties can help mitigate this
 

TDS on NRO accounts: TDS applies to NRO interest; NRIs can claim refund on excess TDS when filing tax returns
 

Declaration of income: Income from NRO accounts must be declared in the NRI’s Indian tax return
 

Source: Singhania & Co