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With RBI allowing free transfer of funds from NRE to NRO Accounts, NRIs can plan tax exemption & easy repatriation!

                         In the past decade, the Reserve Bank of India (RBI) has granted liberal facilities to Non-Resident Indians (NRIs), not only for repatriation of their current income earned in Indian Rupees, but also for remittances for specified purposes and substantial repatriation out of their Non-Resident Ordinary bank accounts. 

                         For the above purposes, an NRI would in fact mean not only an Indian National Resident outside India, but also a Foreign National of Indian origin who is a Non Resident i.e. Persons of Indian Origin (PIOs).


              NRIs are permitted to maintain two types of bank accounts, popularly referred to as Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts. Since the credits into the NRE accounts have a direct link with foreign exchange remitted by the NRI into India, interest income earned on NRE balances or deposits have been granted total exemption u/s. 10(4) of the Income-tax Act, without any monetary ceiling. However, it needs to be noted that interest income earned on NRO balances or deposits is taxable at normal rates under the Income-tax Act. Moreover, such interest is also liable to TDS in accordance with the provisions of Section 195 of the Act.

              While the balance in NRE account has always been allowed to be freely repatriated without any monetary ceiling, repatriation out of NRO account has been a subject matter of phased out liberalization over the years.


              Since 2003, RBI has permitted free remittance to an NRI, even from the balances lying in his or her NRO account, up to US $ one million per financial year, for all bonafide purposes. It also needs to be noted that RBI has instructed Authorized Dealers (banks entitled to deal in foreign exchange) to effect all such remittances without any approval from RBI. No wonder, these provisions have been greatly welcomed by all NRIs and PIOs.

            However, for making an outward remittance from the NRO account, the NRI account holder is required to initiate the same by filling up a request letter addressed to the bank specifying the relevant details of remittance, alongwith certificates in Form 15CA and 15CB duly filled in by a Chartered Accountant certifying that the necessary tax obligations in regard to the remittance have been fulfilled.


                       Vide its latest A. P. (DIR Series) Circular No.117 dated May 07, 2012, the RBI has announced that every NRI shall be eligible to transfer funds from his or her NRO account to NRE account, within the overall ceiling of US $ one million per financial year, subject to payment of tax, as may be applicable. Such credit of funds to NRE account shall be treated as an eligible credit, in terms of paragraph 3(j) of Schedule-1 of Notification No. FEMA.5/2000-RB dated 3rd May 2000, which specifies eligible credits into the NRE account.

                      In view of the aforesaid relaxation, an NRI, who has invested his Rupee funds in NRO bank deposits, would be well advised to transfer the same as NRE bank deposits, with a view to avail strategic advantages of income-tax exemption and ease of repatriation. The case study, hereunder, will amply highlight the same:

  Case Study: Mr. NRI has NRO bank deposits in India worth Rs.10 crores (equivalent to approx US $ 1.8 million). He is earning interest on the same at 9.25% per annum. However, on the annual interest of Rs.92,50,000 earned by him, he is required to pay income-tax of Rs.26,83,150, pursuant to which the post-tax return works out to Rs.65,66,850, which effectively translates to a post tax yield of 6.57%.

 Taking advantage of the above relaxation, Mr.NRI can fully transfer the entire Rs.10 crores of NRO deposits into NRE deposits in two financial years, keeping in view the directive for maximum conversion of US $ 1 million per year.

  Since December, 2011, interest rates on NRE bank deposits have been deregulated by the RBI and accordingly, such deposits now earn attractive rates almost identical to NRO bank deposits. Hence Mr. NRI can continue to avail the same interest rate of 9.25% per annum, even on his converted NRE deposits.

  However, keeping in mind the total tax exemption u/s. 10(4) of the Income-tax Act, he would earn the entire interest of Rs.92,50,000 on his NRE bank deposits without a penny of tax thereon. He would thus fetch a higher yield of 2.68% earning full 9.25% tax free return on his NRE deposits, as compared to the 6.57% post-tax yield on NRO deposits. In other words, the 9.25% return would work out to an equivalent effective 13.39% pre-tax yield, considering the applicable tax bracket of 30.9% in the case of Mr.NRI.

 And last but not the least, once his funds are in the NRE channel, he can repatriate the entire balance at one go, without any monetary ceiling or restriction.

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