Legalities of NRE account: a step-by-step guide

Legalities of NRE account: a step-by-step guide: While staying abroad, many people have financial responsibilities towards their family and loved ones. They can either be a Non-Resident Indian (NRI), or a Person of Indian Origin (PIO). The former refers to the persons who have migrated to a foreign land for a job or higher studies, while the latter represents the citizens who have held the Indian passport or have relatives of Indian origin. In both these cases, individuals can open a Non-Resident External Account (NRE) to maintain and operate the banking activities in India.  

Legalities of NRE account: a step-by-step guide

What is an NRE account? 

An NRE account is denominated in the Indian currency as the money sent from abroad gets instantly converted. The funds deposited has to be from a foreign source, and at the time of deposit, it gets converted to Indian Rupees. The remittances can be given to the family members from abroad, and it is freely repatriable. 

Here are some of the legalities that are part of NRE account: 

We are providing all the details of opening and operating an NRE account in India as per the Schedule 1 of Foreign Exchange Management (Deposit) Regulations, 2016. 

Account holder: Any Non-resident Indian (NRI) and Person of Indian Origin (PIO) is permitted to open and regulate the NRE account in India at banks including cooperative banks authorized by the Reserve Bank of India. In the occurrence of the death of the account holder, the money will be transferred to the NRI joint holder or nominee of the deceased. If the nominee is Indian, then a request has to be put forward to RBI for the claim process.

Types of account: The NRE account can be generally maintained in three forms, that is current, savings and recurring/FD account. 

Joint account: In case an NRI or PIO prefers to have a joint account, they can open it with two or more NRIs and PIOs, though there is a restriction in opening an account with a citizen of India. In case they wish to operate the account with an Indian relative, then they can only handle the account as Power of Attorney (PoA).

Remittances: Both inward and outward remittances are permitted in these accounts. The inward remittances like credit accrue interest on investment.

Debit: The debit allowed in the NRE accounts can be the local disbursement, transfer to another NRE account or FCNR account and towards other investments made in India. 

Credit: The permissible credit in an NRE account can be current income, pension, rent, dividend, interest, etc., given that the authorized bank is satisfied that this credit signifies a current income of the PIO/NRI account holder, and the income tax has been paid, deducted or provided as may be the case. 

Loan: The loan in an NRE account is sanctioned by the authorized bank in India, against the security of funds held in the account to the account owner and third party in India. The loan amount can be easily repatriated outside India, but there is a strict provision regarding its usage. It can be used for the following purpose:

1. It can be used for any business activities, except for buying plots for plantation activities or agricultural fields and any investment in real estate houses.
2. It can be used for having an apartment or house for personal residential use as per the regulations made under the act. 
3. It can be used to contribute to the capital of Indian companies/firms. This direct investment in India has to be on a non-repatriation basis as per the regulations made under the act. 

When the loan is sanctioned to a third party, there no direct or indirect foreign exchange consideration for the NRI or PIO depositor. He needs to deposit all these assets so, that the third party or firm can obtain the loan facility. When the loan is sanctioned to the NRI or PIO it can be adjusted through the deposits, inward remittances outside India, or through the transfer of funds from another NRO account of the account holder. 

The authorized bank can also sanction the loan through its branches or correspondents present outside India at the request of the account holder. In case the loans are taken against any deposit, then there will be no premature withdrawal allowed on the deposited amount. 

Account status: If the account holder returns to India for taking up new a profession or change the residential status then, the NRE account will be transformed to a resident account or the deposits will be converted to RFC accounts. 

Power of Attorney: The Power of Attorney (PoA) has to be nominated by the NRI or PIO on their behalf to carry some financial activities. However, there are particular limitations on the financial activities of PoA like he cannot open an NRE account, cannot provide gifts to an Indian on behalf of the account holder, repatriate money outside India, and transfer funds from another NRE accounts. 

Tax: The interest earned from deposits held in the NRE accounts are free from income tax liabilities. Similarly, there is also no wealth tax in these accounts.

Terms and conditions: Terms and conditions like interest rate, tenure, and others are applicable under the guidelines of the Department of Banking Regulations and RBI. 

Therefore, whenever you open an NRE account in India, these are the important legalities you to be aware of in the context of Indian Banking.

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