Why an NRI cannot invest through an NRO Account?

Varun Hariharan

10 Sep, 2020

An NRI is referred to as a Non-Resident Indian who has stayed outside India for a specific period. The Government of India and the Reserve Bank of India amended the definition of an NRI from time to time. Previously, when an individual stayed outside India for more than 182 days, then the individual would be considered as an NRI for tax treatment. There are different forms of accounts that an NRI can own in India. One such account is the NRO Account.

To understand the features of an NRO account, it is essential to interpret the below terms:

• NRI- Referred to as a Non-Resident Indian- Previously an individual who stays outside India for more than 182 days is termed as an NRI. However, as per the Finance Act, 2020, the definition of NRI has changed. This change is relevant for tax purposes. As per the above act, if a resident Indian stays in India for more than 120 days, then he will be treated as an Indian.

• PIO- PIO is an abbreviation for the person of Indian origin. This will include a foreign citizen except for the countries that share land borders with India and Iran.

• FEMA- The Foreign Exchange Management Act, 1999 is the regulation dealing with the transfer of foreign currency inside and outside India. This legislation would govern any form of foreign exchange dealings.

• Authorised Dealer/ Authorised Bank- Under the Foreign Exchange Management Act, 1999 the Reserve Bank of India^[1] (RBI) has given the responsibility of handling foreign exchange transactions to authorised banks. All forms of remittances and related transactions would be handled through an Authorised Dealer/ Authorised Bank.

Different types of Bank Accounts Held by an NRI: NRO, NRE and FCNR

An NRI or PIO can hold different forms of bank accounts for managing money in India. Managing money would hard for an NRI if there are a different form of exchanges under the same bank account. For example, managing Indian rupees, as well as USD through the same account, would be a challenging task.  An individual would have to earn outside India in the form of salary which is credited from a foreign company to be considered as a NRI.  Under no circumstance is an NRI allowed to maintain an Indian account. If an NRI maintains an Indian Bank account, then the penalty would be present under the respective authority.

Hence the Reserve Bank of India (RBI) under FEMA regulations has classified accounts into the following:

1. NRO Account
2. NRE Account
3. FCNR Account
4. SNRR Account

1. NRO Account

An NRO account is an abbreviation for Non-Resident Ordinary Account.  The RBI allows an Indian bank to open an NRO account for an NRI.  The NRO account can be maintained in the form current account or savings account or the form of a fixed deposit account. 

The following are the features of an NRO Account:

• An NRI opens an NRO account where foreign currency as well as Indian currency can be deposited. Hence this account is beneficial for an individual having both foreign currency and Indian currency.
• Interest is charged on balance maintained in this form of account.
• Tax Deducted as Source is charged on the interest earned in this form of account. Therefore, any form of interest which is earned in this form of account is also subject to the provision of Income-tax.
• Tax charged in this form of account would be levied at the respective tax slab rates.
• Both NRI and PIO can open an NRO account for carrying out transactions. Here transactions would relate to maintaining balance which comes into the account. Such will include any form of dividend earned by owning shares in an Indian company, rental income and other forms of income.
• To open an NRO account, the NRI must provide proof of residence abroad. Apart from this, the NRI must also show a valid visa or offer letter for foreign employment.
• Funds can be transferred from one NRO account to another NRO account. Hence it is clear that funds present in this form of account are freely transferable.
• Money which is present in this account can be repatriated. However, money up to a specific limit can only be repatriated outside India. Only up to USD 1 Million can be repatriated outside India. If the NRI wants to repatriate more amount than the above, then specific permission has to be taken from the RBI. The interest present in the NRO account would be allowed to be repatriated outside India. Only when it comes to repatriation of the principal amount, then limited value is allowed to be transferred.
• NRO accounts can be opened as a joint account. The individuals who maintain the joint account can be either an NRI or a resident Indian. However, two or more NRI’s are also allowed to maintain an NRO account.
• If the NRI is maintaining funds in India, then it is beneficial to open an NRO account.

2. NRE Account

An NRE account is an abbreviation for Non-Resident (External) Rupee Account. This form of account can be opened in any form which is similar when compared to the NRO account. NRI and PIO are allowed to open these types of accounts with specific authorised banks which are under the Reserve Bank of India.

The main features of the NRE account are as follows:

• NRE Account is different from NRO account.
• Foreign currency which is earned by an NRI can be transferred to this account. The amount of foreign currency transferred to this account will happen through normal banking channels with specific permission of the authorised bank.
• Foreign currency transferred to this account will be freely converted to Indian currency. If an NRI wants to convert foreign currency into Indian currency, then this form of account would be beneficial for the NRI.
• Foreign currency which is converted will be present in this form of account if it is not used in a specific manner.
• This form of account uses foreign currency and converts it to the Indian currency. Any form of rent earned, or dividend is not allowed in this form of account. If an NRI is earning any form of dividend income or rent, then opening an NRO account would be preferred.
• Interest earned on the principal amount is not taxable like the interest taxable on the NRO account. Hence any form of interest earned and accrued in this form of account is not taxable. This would be beneficial if some form of interest has to be earned by the NRI.
• When it comes to repatriation, then the principal amount, as well as the interest earned in the account, is repatriable. There is not any form of specific limit on the amount which can be repatriable outside India. Both the principal amount as well as the interest which is earned in the account can be repatriated outside India.
• An NRE account opened by an NRI can be held jointly. However, the individuals who hold the NRE account jointly must only be NRIs. An NRE account cannot be operated by an NRI and a resident Indian like an NRO account.
• Money can be transferred from an NRE account to another NRE account. Apart from this, the regulation allows money to be freely transferred from an NRE account to an NRO account.
• The different form of permissible debits which apply to NRE account include the following:
  • Any form of local disbursements which can be used by the NRI.
  • Any form of remittances made outside India.
  • Transfers are also allowed to be made to NRE or FCNR accounts or any form of an account holder who is eligible to hold this form of account.
  • Any other transaction which is accepted and permitted as law by the RBI.

3. FCNR Account

An FCNR account is an abbreviation for the Foreign Currency (Non-Resident) Account. This account is another form of bank account allowed to be opened by the RBI. NRI and PIO’s are allowed to open this form of account. Unlike NRO accounts and NRE accounts, the FCNR has only one format of being open. This would be in the form of a fixed deposit account with the authorised dealer.

 The following are the features of an FCNR Account:        

• Deposit of different forms of foreign currency is allowed in this form of account. The foreign currency can be US dollars, GDP, Japanese Yen, and Euros.
• This account can be opened in a normal way. Funds are usually transferred from outside India through normal banking channels. Different forms of currencies are allowed in this account.
• Foreign currencies present in the FCNR account is kept in a fixed deposit format. Hence currencies kept in this account cannot be removed.
• Money kept in this form of account can be repatriated to the foreign country.
• All forms of credits are allowed by the FCNR. The working of the FCNR account is similar to the NRE account.
• When an NRI opens an FCNR account, then he is allowed to open it with another NRI. This status is similar to the NRE account, which is open by two NRIs.

4. SNRR Account

SNRR is an abbreviation for Special Non-Resident Rupee Account. This form of account can be opened by NRI and PIOs who have some form of interest in India. The RBI has a set of specific guidelines for running the SNRR account.

The following are the features of the SNRR account:

• This account is usually opened by NRI and PIOs that have some form of business interest in India. For investment, this account will be opened.
• As per the guidelines of RBI, the SNRR account is used for placing rupees. These guidelines can be updated and amended by the RBI from time to time.
• If this form of account is opened by a national of Pakistan or Bangladesh, then prior approval from the RBI is required.

Which form of account is best suited for the needs of an NRI?

Usually, the NRI will choose an account depending on the circumstances. If an NRI does not have any form of Indian payments such as dividends from Indian companies, any form of rent from any particular commercial or residential property, or any other form of pension payment from Indian authorities, then choosing an NRE account would be suitable. There are different benefits to choosing an NRE account. First and foremost foreign currency deposited in this account will be converted into a specific form of Indian currency. This is not possible in an NRO account.

Hence if an NRI does not have many investments in India, then choosing to open a basic NRE account with an authorised bank would be suitable. However, say the NRI wants to have a joint account with a resident Indian, then choosing the NRO account would be suitable. Different form of investments can be easily and locally managed through the NRO account. However, the only disadvantage is the requirement to pay the amount of tax (tax deducted at source) on the interest earned and the principal amount.

Can an NRI invest through an NRO account?

So from the above, the different types of accounts which can be opened by an NRI are explained and analyzed. However, there is no clarity whether the investment by an NRI through the NRO account is limited or restricted. Taking the above analysis, we will come to a conclusion on the same.

The following analysis is required to understand this prospect:

• Repatriation- In the NRO scheme, the amount of interest is allowed to be repatriated back to the foreign country. When it comes to the principal amount, only up to USD 1 Million can be repatriated back to the foreign country. If more amount of foreign investment has to be repatriated back to the foreign country, then specific approval is required by the RBI.
  
• Managing Investments- Through the NRO scheme, an NRI can receive any form of rent or dividend income which is earned domestically in India. Though this income is taxable and can be managed, it can be transferred to an NRO account. There is no specific mention of investment through this form of account. Managing foreign funds as well as Indian earned funds is possible through this account.

From the above, it is clear that repatriation of a limited amount of funds is possible through this account. Managing a specific amount of funds is also possible through the NRO account.

Conclusion

Read our article:NRI Loans to Resident Indian/ Indian Company