Types of NRI Accounts: Check Features, Benefits & Drawbacks

Posted by Samantha Kennedy on May 31st, 2021

NRIs (Non-Resident Indians) with foreign and locally sourced income often find it challenging to manage money matters in the motherland. This is where NRI accounts come in handy.  According to the Foreign Exchange Management Act (FEMA), an NRI can operate three types of bank accounts (NRE, NRO, or FCNR) in India.  Let’s tell you about their distinctive features, benefits, and drawbacks.

Non-Resident External (NRE) Account:

This is a rupee-dominated account that can be held in the form of savings, current, recurring, or a fixed deposit. The NRE account is essentially used to stash foreign income. The funds get converted into INR at the time of deposit. NRE accounts can be opened individually or with another NRI.

Benefits:

• Both principal and interest components in NRE accounts is fully repatriable.
• The interest accrued on the NRE account is completely tax-free.
• You can open a joint holding account with another NRI or any resident Indian.
• The interest rate offered is good.

Drawbacks

• Deposits made in foreign currency are prone to exchange rate fluctuations as well as conversion loss.

Non-Residency Ordinary (NRO) Account

NRO account is also maintained in rupee terms and can be opened as savings, current, recurring, or a term deposit.  Money can be put in Indian or foreign currency but withdrawn only in INR.  The account is useful for managing income generated from local sources like dividends, rent, pension, etc. An NRO account can be held with another NRI or a resident Indian.

Benefits

• Since the money is also deposited in Indian rupees, there is no exchange risk or conversion loss.
• The interest rate offered is good.

Drawbacks

• In the case of NRO accounts, there are some restrictions for repatriability of funds. The principle amount up to million can be transferred in a financial year. Interest earned is fully repatriable.
• Deposits made in India is fully taxable at 30%.
• While you can hold an NRO account jointly with a resident Indian, S(he) has to be a close relative and can be made on a ‘former or survivor’ basis.

Foreign Currency Non-Resident (FCNR) Account

The FCNR account is available as a term deposit format with a maturity tenure ranging between 1-5 years. It allows NRIs to deposit money in nine freely convertible currencies (U.S. Dollar, Canadian Dollar, Australian Dollar, Pound Sterling, Euro, Japanese Yen, and Deutsche Mark). The foreign currency account safeguards against forex rate fluctuations. Not to mention, the interest earned is tax-free and the entire balance fully transferable.

Benefits:

• Since both the deposits and withdrawals can only be made in foreign currency, it has no conversion loss or exchange risk.
• Both principal and interest components in FCNR accounts are fully repatriable.
• The interest accrued on FCNR account is completely tax-free.
• Better access to loans in India against deposits.
• The interest rate offered is good.

Drawbacks:

• The lock-in period of 1-5 years in FCNR account takes away the flexibility of withdrawing money anytime.
• Withdrawals can only be made in a foreign currency.

The three types of NRI accounts are created to facilitate transactions of the global Indian. However, they serve a different purpose. For instance, NRIs with a DEMAT account through NRE/NRO accounts have access to investments in India. They can generate wealth by participating in the Indian stock market through the Portfolio Investment Scheme (PIS) introduced by the RBI. FCNR accounts help NRIs park their foreign currency in India while facing no conversion loss. It is essential to assess your banking needs and pick the most suitable option.