Blog

Ultimate Guide to NRI Status: Everything You Need to Know About Taxes, Remittances, and Accounts

by | Feb 22, 2024

Non-resident Indians (NRI) are individuals who are of Indian origin and are living abroad. An NRI is a person who has lived outside India for more than 182 days in a financial year or who has left India with the intention of residing outside the country for an indefinite period. NRIs may be working or studying abroad or may have migrated to another country for personal reasons.

NRIs have specific financial needs and requirements, which are different from those of resident Indians. The Indian government has implemented various policies and regulations to address these needs and facilitate the smooth transfer of funds to and from NRI accounts.

Permitted Remittances from and to NRI Accounts

NRIs have the facility to open NRI accounts in India, which can be used to remit funds to and from their home country. The types of accounts available to NRIs include Non-Resident External (NRE) accounts, Non-Resident Ordinary (NRO) accounts, and Foreign Currency Non-Resident (FCNR) accounts.

Non-Resident External (NRE) Accounts

An NRE account is a savings or current account that can be opened by an NRI in India. Funds in an NRE account are held in Indian Rupees, and the account holder can repatriate the funds in a foreign currency of their choice. NRE accounts can be held jointly with another NRI or a resident Indian.

The following are the permitted remittances from NRE accounts:

  • Funds can be remitted to any account held in the name of the account holder in India.
  • Funds can be remitted to the account holder’s foreign account in any foreign currency.
  • Funds can be used to make investments in India, subject to the rules and regulations set by the Reserve Bank of India (RBI).
  • Funds can be used to make donations to charitable organizations in India.

Non-Resident Ordinary (NRO) Accounts

An NRO account is a savings or current account that can be opened by an NRI in India. Funds in an NRO account are held in Indian Rupees and cannot be repatriated to a foreign currency. NRO accounts can be held jointly with another NRI or a resident Indian.

The following are the permitted remittances from NRO accounts:

  • Funds can be remitted to any account held in the name of the account holder in India.
  • Funds can be used for local payments in India, such as paying bills, rent, or taxes.
  • Funds can be used for investments in India, subject to the rules and regulations set by the RBI.
  • Funds can be used to make donations to charitable organizations in India.

Foreign Currency Non-Resident (FCNR) Accounts

An FCNR account is a term deposit account that can be opened by an NRI in India. Funds in an FCNR account are held in foreign currency, and the account holder can repatriate the funds in the same foreign currency. FCNR accounts can be held jointly with another NRI or a resident Indian.

The following are the permitted remittances from FCNR accounts:

  • Funds can be repatriated to the account holder’s foreign account in the same foreign currency.
  • Funds can be used to make investments in India, subject to the rules and regulations set by the RBI.
Key Difference between NRE & NRO accounts:

While both accounts are designed for NRIs, there are some key differences between them. Here are some of the main differences between NRE and NRO accounts:

  1. Purpose of the Account: NRE (Non-Resident External) accounts are used to park and manage funds that originate outside of India. These accounts are typically used for maintaining income earned overseas, such as salary, rent, dividends, etc.

NRO (Non-Resident Ordinary) accounts, on the other hand, are used for managing income that is earned in India, such as rent, dividends, and other types of income that originate from within the country.

  1. Repatriation of Funds: One of the key differences between NRE and NRO accounts is the ease with which funds can be repatriated to the NRI’s country of residence. Funds in NRE accounts are freely repatriable, which means that they can be transferred outside India without any restrictions. This means that the funds held in an NRE account can be easily repatriated to the NRI’s country of residence in a foreign currency.

Funds in NRO accounts, on the other hand, are not freely repatriable. The amount of money that can be transferred outside of India from an NRO account is subject to certain limits and requires approval from the Reserve Bank of India (RBI).

  1. Taxation: Another key difference between NRE and NRO accounts is the tax treatment of the funds held in each account. Interest earned on funds held in an NRE account is tax-free in India, which means that NRIs do not have to pay tax on the interest earned on these accounts. However, NRIs may be required to pay tax on the interest earned on funds held in an NRO account.
  2. Currency: NRE accounts can be maintained in Indian rupees or foreign currency. NRO accounts, on the other hand, can only be maintained in Indian rupees.
  3. Joint Accounts: NRE accounts can be held jointly with another NRI, while NRO accounts can be held jointly with an NRI or a resident Indian.

 

Taxation of Non-Resident Indians (NRI) in India

NRIs are subject to different tax rules and regulations in India compared to resident Indians. The taxation of NRIs in India depends on their residential status, i.e., whether they are considered a resident or non-resident for tax purposes.

Residential Status of NRIs for Tax Purposes

 

The notification from the income tax department clarifies that an NRI is an individual who is a citizen of India or a person of Indian origin and who is not a resident of India. To determine the residential status of an individual, Section 6 of the Income-tax Act is used. An individual is deemed to be a resident of India if he or she satisfies any of the following conditions:

  1. If he or she is in India for a period of 182 days or more during the previous year.
  2. If he or she is in India for a period of 60 days or more during the previous year and 365 days or more during the four years immediately preceding the previous year.

However, there are exceptions to these conditions. For example, in the case of an Indian citizen or a person of Indian origin who visits India during the year, the period of 60 days mentioned above is substituted with 182 days. Additionally, an Indian citizen whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year is deemed to be a resident in India if he or she is not liable to pay tax in any country.

Tax Implications for NRIs in India

  1. Income earned in India: NRIs are subject to tax in India on the income they have earned in India. This includes income from employment, business or profession, rental income, capital gains from the sale of property or investments in India, etc.
  2. Income earned abroad: NRIs are not subject to tax in India on the income they have earned abroad. However, they may be required to pay tax on the income they have earned abroad in the country where it was earned.
  3. TDS (Tax Deducted at Source): TDS is deducted from the income of NRIs in India, just like resident Indians. The TDS rates for NRIs are higher than those for resident Indians.
  4. Double Taxation Avoidance Agreement (DTAA): India has signed DTAA with various countries to avoid double taxation of income. NRIs can claim tax relief under DTAA if they have paid tax on the same income in India and another country.
  5. Tax Return Filing: NRIs are required to file a tax return in India if their income in India exceeds the basic exemption limit (currently INR 2.5 lakhs). NRIs are also required to file a tax return if they have any income from capital gains or any income that is not subject to TDS.

Will a student going abroad to study be treated as an NRI?

Yes, a student who is going abroad to study will generally be treated as an NRI (Non-Resident Indian) for income tax purposes in India. The student’s residential status is determined based on the number of days he or she stays in India during a financial year (which runs from April 1 to March 31).

As per the Income Tax Act, an individual is considered an NRI if he or she satisfies either of the following conditions:

  1. The individual has been outside of India for 182 days or more during the financial year, or
  2. The individual has been outside of India for a period of 60 days or more during the financial year and has been outside of India for a total of 365 days or more in the preceding four financial years.

Recent Blogs

How to Avoid Paying Takeover Charges When Switching Banks?

  In the realm of corporate financial consultancy, one unfortunate trend persists within the Indian banking culture. When corporate clients decide to shift their credit facilities to another bank for better services and competitive pricing, their existing bankers...