To comply with the Foreign Exchange Management Act (FEMA) rules, an NRI cannot have regular savings accounts in India. Therefore, you must convert existing accounts to NRO accounts and excess accounts must be closed. This step is important once your status changes from resident Indian to NRI and can be done either online, for selected banks, or during your next visit to India.

Non-Resident External (NRE) Account

An NRE account can be opened only once you are an NRI as a fresh account. Old accounts, which existed when you were a resident Indian, must be converted into NRO accounts, not NRE accounts. You can check your NRI status here: Who is an NRI and who is not? Understanding FEMA and NRE/NRO bank accounts.

This account is used to send money to India. The features and uses are:

• This is a fresh account that can only be opened by an NRI. Existing resident Indian or NRO accounts cannot be converted to NRE.
• Money deposited in this account must originate outside India.
• Interest earned is tax-free in India but may be taxable in the country where the NRI is residing.
• You can send both interest and principal out of India without limits.
• Deposits can only be made in foreign currency, and withdrawals are in INR.
• Joint accounts are allowed only with another NRI.
• You can transfer funds to other NRE or NRO accounts.
• It may be used for stock investing but is not recommended.
• It is the best option for Mutual Fund investing due to easy repatriation.
• It cannot be used for investing in RBI/Gilt bonds.
• Once you return to India, NRE account must be converted to a resident account once you are a resident Indian as per FEMA (“intention to stay in India for more than 182 days”)

Non-Resident Ordinary (NRO) Account

This account is used for any income and investments in India. The features and uses are:

• Existing savings accounts are converted to NRO accounts (and not NRE) once you leave the country and status changes to NRI from resident Indian as per tax residency rules.
• Interest earned is taxable in India at current slab rates. The benefit of the Double Taxation Avoidance Agreement (DTAA) is available with most countries so that you can offset tax paid in India as an input tax credit in your home country.
• You can send both interest and principal out of India, but the principal must be within $1 million. A CA must certify that you have paid taxes on this income.
• You can make deposits in both foreign currency and INR, and withdrawals are in INR.
• Joint accounts are allowed with another NRI or a resident.
• Incoming transfer into NRO from Indian resident accounts do not attract TCS under the LRS rules
• Funds can be transferred only to another NRO account or to even resident accounts.
• Transfer from NRO to an NRE account i.e. for repatriation is capped at $1 million per financial year and requires CA input on the required forms to be filled
• This account is used to receive income from interest, FD, rent, stock and MF dividends, and the proceeds from selling real estate, stocks, and mutual funds.
• It can be used for both stock and MF investing.
• Only NRO accounts can be used for investing in and for receiving interest from RBI/Gilt bonds from the RBI Retail Direct Portal.

Foreign Currency Non-Resident (FCNR) Account

Note: FCNR(A) accounts were discontinued in 1993 and used to have exchange rate guarantee from the RBI. Now only FCNR(B) accounts, without exchange rate guarantees, exist.

• NRIs or PIO card holders can open FCNR(B) accounts either singly or jointly with other NRIs
• FCNR(B) accounts are term deposit (FD-type) accounts held in foreign currency (USD, EUR, GBP, AUD, SGD, CAD, CHF, HKD are typical)
• Interest is paid every 180 days and the account matures in one to five years
• Interest earned is tax-free in India
• Both principal and interest are fully repatriable
• Pre-mature withdrawal is possible with interest rate penalties
• They eliminate currency conversion risk since they are held in foreign currency
• Can be used for payments in India, making investments and transfers to other NRE or FCNR accounts

Resident Foreign Currency (RFC)

Resident Foreign Currency (RFC) are for NRIs who have returned to India and used to store foreign currency, say in USD, GBP and EUR

• Allows returning NRIs to hold onto foreign currency instead of immediately converting to INR
• These amounts are repatriable and can receive funds from abroad or other NRE / FCNR accounts
• Interest rates are generally lower than FCNR or NRE accounts
• The interest income on these accounts are taxable at slab rates
• RFC accounts help you time your currency conversions from foreign currency to INR based on expected rate movements
• Use the RFC account if you have large INR liabilities (e.g. builder payments for an under-construction house) and you expect the Rupee to depreciate against your foreign currency holdings

This table summarises these account types for every type of tax status:

What is TDS and why does it apply to NRIs?

Tax Deduction at Source (TDS) is the income tax which is deducted before the income is given to you.

A classic example of TDS is a bank deducting the due tax on interest before sending the interest to your account. This way, it becomes your responsibility to file an income tax return (ITR)and reclaim the TDS amount if more than what you actually need to pay has been deducted:

• Income happens between 1st April and 31st March (this is the financial year in India)
• TDS is associated with this income
• Capital gains tax or income tax, if more than the TDS amount, is due before 31st March (advance tax)
• Income tax return must be filed on or before the following 31st July (though the government extends this date sometimes)
• Any unpaid capital gains/income tax must be paid along with return filing (self-assessment tax)
• If TDS is more than the capital gains or income tax, there will be refund as per the income tax return and will be credited to the bank account linked with the return filed
• Any tax paid on this Indian income will be available as a tax credit in your home country under DTAA (please check official tax websites for the latest rules)

Advance tax dates for India

In each of the above cases, you need to subtract the advance tax already paid.

Section 195, which covers TDS, applies to NRIs having income from India from multiple sources like rental income, dividends, capital gains from real estate / stocks / mutual funds etc. For NRIs, TDS applies to every income source in India except NRE FDs.

When is TDS due?

TDS (tax deducted at source) is applied at the time of receiving income or capital gains. If you are an NRI who earns rental income, dividends, or sells property, the TDS is deducted before you receive the funds. The applicable rate depends on the type of income and tax treaty (DTAA) with your home country. If excess TDS is deducted, you can request a refund by filing an income tax return by 31 July.

Failure to deduct TDS, for example by the tenant, will lead to penalties.

What are the TDS rates applicable to NRIs?

These TDS rates are designed in a way that they are the same or higher than the actual tax due. A cess of 4% applies to all TDS figures.

Gifts from resident Indian accounts to NRO accounts are TDS-free since it is not an income.

Note: See page 117 of Finance Bill 2024 for details of changing the TDS for property sales by NRIS from 20% to 12.5% under Section 195.

Remember: NRE FDs are tax-free in India and do not have TDS.

There are no lower thresholds for these TDS limits for NRIs unlike, say, real estate where TDS (that too only 1%) kicks in only if the property is more expensive than 50 lakhs. If tenants and real estate buyers don’t declare and deposit TDS on the income tax website, they will face interest and penalties.

Does TDS mean double taxation?

TDS is a form of advance tax deduction. If your actual income tax (whether from ordinary income or capital gains) is less than the TDS, you will get an income tax refund provided you file your income tax return by the usual deadlines. If the TDS is less than the income tax due, then you need to either pay advance tax (before 31st March) or self-assessment tax before income tax return filing.

How is TCS different from TDS for NRIs?

Tax Collected At Source is TCS

TCS is applicable only to resident Indians and is not applicable to NRIs. Resident Indians typically pay TCS when:

• remitting money abroad under LRS for invests, travel and foreign education: Latest on TCS and LRS
• 1% on buying a car of more than ₹10 lakhs: Frequently asked questions (FAQs) on Tax Collected at Source (TCS) when you buy a car

How does DTAA come into the picture regarding TDS and income tax for NRIs?

A Double Taxation Avoidance Agreement (DTAA) between India and the home country of an NRI allows offsetting the income tax already paid in India for Indian income in the home country and vice versa

The latest DTAA rules as per the Indian income tax website are here: International Taxation >Double Taxation Avoidance Agreements.

For example, an US tax-resident having 10 lakhs of income in India and have already paid say 2 lakhs tax on this income can claim a foreign tax credit of ₹2 lakhs while filing an US tax return which will include this 10 lakhs as a part of global income reporting. If the tax due in the US on this 10 lakhs is ₹3 lakhs (hypothetically), the NRI will be required to pay only the remaining ₹1 lakh after claiming foreign tax credit under DTAA.