NRE Account – What It Is (A to Z Guide)
If you are an NRI living outside India, you might have heard of the NRE account. In fact, you might have already been advised to open one. It comes up in every discussion regarding “How does NRE account work for NRI banking”, almost immediately after relocating outside of India and finding that your resident savings account is no longer the best option.
We have covered everything you need to know about the NRE account: what is NRE account meaning, how does it work for an NRI, who can open it, its NRE account tax exemption rules status and repatriation rules.
NRE account meaning
First, let us start with the basics. NRE stands for Non-Resident External, and it refers to a rupee account that a Non-Resident Indian (NRI) can open in India to park their foreign earnings. The individual’s foreign income gets converted to local currency and kept in the NRE account.
When someone asks what is NRE account meaning, you can explain that it is an Indian bank account denominated in rupees that is designed to hold foreign income. In other words, an NRE account cannot be used to store local earnings.
If an NRI has local income, say, rent from a property in India, or dividends from an Indian stock, they have to be deposited in a different account called the NRO account. We will get to the differences between the NRE vs NRO accounts shortly.
An NRE account can be a current or savings account, or even a recurring or fixed deposit. The tax benefits and repatriation rules apply to all types, so that you can choose the one that best suits your needs.
How does an NRE account work for an NRI?
Now, let us take a look at how does NRE account works for an NRI. The working of an NRE account is actually quite straightforward. The individual has their income in foreign currency and deposits it into their NRE account, where it gets converted to rupees at the prevailing exchange rate. From there on, it functions much like a standard bank account – they can withdraw or transfer the amount to pay for local expenses, or let it earn interest as a fixed or recurring deposit.
The only restriction is that the deposits in the NRE account should be from foreign income. The individual can also transfer funds from their other NRE or FCNR (Foreign Currency Non-Resident) accounts, but not from their local income. In the event that they try to deposit local income into the NRE account, they will run into complications, as the account is not supposed to have local earnings.
Since the NRE account deposits are in rupees, there is one more thing to consider – exchange rates. If the local currency depreciates significantly against their home currency before they repatriate the funds, they will receive fewer foreign currency units.
NRE account eligibility for NRI
Moving on, the NRE account eligibility for NRI is rather simple. An NRE account can be opened by anyone who falls under the following criteria:
- A Non-Resident Indian (NRI), i.e., an Indian citizen who resides outside India for employment, business, or any other reason
- A Person of Indian Origin (PIO) or an Overseas Citizen of India (OCI).
An individual can also open an NRE account jointly. While it can be done with another NRI, they can also open an account jointly with a resident family member on a former or survivor basis. In the latter case, the family member can only operate it as a power of attorney as long as the original account holder is alive.
How to open NRE account online
- Choose a bank and compare the NRE savings account interest rates and fixed deposit interest rates, as well as the digital banking facilities and level of customer service
- Fill out the application form on the bank’s website or portal
- Provide the required supporting documents, which generally include the passport, visa, employment or residency proof, Indian address proof (if any), and photos Get the documents verified, which can involve embassies, notaries, or video conferencing
- Fund the NRE account with a remittance from abroad.
NRE account tax exemption rules
When it comes to the NRE account tax exemption rules, this is the main reason why someone would consider opening one. The interest income on an NRE account is completely tax-exempt in India. Furthermore, there is no TDS (tax deducted at source) on the interest, provided that the individual is a non-resident (as per the NRI definition).
There are two caveats here, however. First, the tax exemption only applies for as long as the individual is a non-resident. Once they move back to India permanently, the bank will redesignate the NRE account to a resident account and the interest income on it will become taxable. Second, while the interest income on deposits in India is exempt, the individual’s country of residence may levy taxes on it, unless there is a double taxation avoidance agreement.
NRE account repatriation rules
As you might have already understood from the above section, repatriation rules for an NRE account are equally attractive. Repatriation simply means transferring funds from an Indian bank account to one overseas. The NRE account repatriation rules, then, are as follows:
The entire principal amount in an NRE account, as well as the interest, is freely and fully repatriable. You can repatriate whenever you wish, without asking for permission from the Reserve Bank of India, and there are no caps on the amount.
This is quite different from the rules that apply to the NRO account. Under the NRO account repatriation rules, an NRI can only repatriate up to one million USD annually, and the process is more involved, requiring additional documentation and clearance from the tax department. The reason why NRE account funds are freely repatriable is that they have been transferred to India from abroad, and thus have already cleared the RBI.
The crux of NRE vs NRO
Frequently asked questions
The bottom line
An NRE account is one of the most convenient ways for an NRI to hold their foreign earnings in India. It allows the individual to keep the money in local currency and enjoy tax-free interest on it. The repatriation rules are also simple – they can take all the money abroad at any time.
It serves its specific purpose, and it does it really well. As long as you follow the NRE account rules and regulations and keep your local and foreign earnings separate, it will do the trick without you having to think about it too much.
