How do NRE accounts work and how safe are they?

by Manshu on June 12, 2012

in Economy

Ajay posted a comment about the safety of NRE accounts, and how they work yesterday, and with the exchange rate where it is – NRE accounts are attracting investors once again.

I have answered preliminary questions about the NRE account in the following three posts and in this one I will answer the question about their safety and mechanics.

NRO Account versus NRE Account

How to open NRO / NRE account when you’re abroad?

Best Bank NRE Rates

How does a NRE account work?

After you open a NRE account, you transfer money in your local currency like the USD, EUR or AUD and the bank uses the current exchange rate to convert that to Indian Rupees and then open a fixed deposit with it.

The NRE account is the closest to a fixed deposit in structure, you put some money in it for a specified tenure for a specified rate, and the bank pays you interest periodically. You can choose how you want the interest to be paid.

This is simple enough, and the only thing to keep in mind here is that the bank doesn’t guarantee an exchange rate to you. The money will convert at the rate that’s current at that time, and when the NRE deposit matures, and you want to withdraw the money, the bank will give you the rate that exists at that time.

This can work both ways and give you extra gains or even a loss. If the Rupee depreciates significantly from the time of your deposit to the time of withdrawal then you will make a loss, and if the Rupee appreciates then that will be a bonus over and above whatever the interest rate was.

Of course, if you don’t convert the money from Rupees then you don’t have to worry about the exchange rate, and that is what a lot of NRIs are using these deposits for as well.

Tax on NRE Deposits

There is no tax in India for NRE deposits but the rules are different in different countries. According to US rules, a resident needs to declare income and pay tax regardless of where they earn it. Other countries don’t have these kind of requirements, and unfortunately I’m not familiar with the details of this aspect so I won’t be able to elaborate more.

Safety of NRE Deposits

Since a lot of large PSU and private banks offer these deposits, it is hard to see a risk of default. Bank failures are rare in India, and to that extent the deposits are quite safe from default and even the interest payment is safe unless something really extra ordinary happens.

I believe I’ve covered most the questions that you will have when you are about ready to start a NRE deposit but please do leave any other comments you may have and I’ll answer them to the best of my knowledge.

{ 30 comments… read them below or add one }

PP June 12, 2012 at 10:56 AM

A lot of my friends in US are concerned about how they will be taxed on the returns from their investments in India, if they repatriate it back to US.

Reply

Manshu June 12, 2012 at 4:49 PM

As far as the US is concerned, any income outside the country is also taxable, and I think not only at the time of repatriation, you have to declare it as you earn it. I’m not well versed with those rules so can’t explain in detail but it is taxable as far as I know.

Reply

PP June 24, 2012 at 6:14 PM

Right, I think you become “Resident” for tax purposes after 5 years of stay in US even if you are on a non-immigrant visa and then you are supposed to declare your global income.

I recently read an article in ET saying that if an NRI staying in US invests in equity/MF in India, he being a US person, the source of his/her income on this investment will be considered as US, and will be taxable in US. Thus, if the capital gains are short term, he/she might get taxed in both countries, and in case of long term gains, income will be taxable in US even if it is tax free in India. Interestingly, however, this doesn’t apply to real estate.

I’m sure this must be a topic of great interest for your readers in US.

Reply

Manshu June 25, 2012 at 5:12 PM

Yes that is true PP – I need to write a lot more posts about things that affect NRIs, that’s one section that’s pretty low on content on the site.

Reply

Sridhar June 12, 2012 at 2:55 PM

Hi Manshu,
What is the interest rate offered on these NRE deposits? How does this compare with rates offered by banks in US or other countries?
What about the liquidity? Can the account holder withdraw the money any time or will there be any penalty for early withdrawals. I am sure most NRIs will have these queries.

Reply

Manshu June 12, 2012 at 4:58 PM

Hi Sridhar,

Good points.

1. The interest rate on these is around the 9% mark which is a lot higher when compared with countries like the US where the interest rates are virtually zero. That’s the main reason why NRIs are interested in getting a deposit in India even though the exchange rate loss can wipe out any gain that they have.

2. They can pretty much break the NRE FD like the other FD and they will get the lower interest of that time period. I don’t know if all banks have penalties or not but you can find one that does not have.

Reply

Shashank June 14, 2012 at 11:28 PM

One more thing to add here : We also have facility of cheque-book facility on NRE accounts.

Reply

Raja June 27, 2012 at 5:48 PM

“This is simple enough, and the only thing to keep in mind here is that the bank doesn’t guarantee an exchange rate to you. The money will convert at the rate that’s current at that time, and when the NRE deposit matures, and you want to withdraw the money, the bank will give you the rate that exists at that time.”

But this problem comes into question only when you want to repatriate the amount back to your origin country, right ?
In cases when you are planning to come back to India, and are ok to withdraw the money in rupees, this problem doesn’t arise. isn’t it ?

Regards
Raja

Reply

Manshu July 1, 2012 at 8:58 PM

Yes Raja – you are spot on.

Reply

dilip July 29, 2012 at 9:03 PM

I am retiring from Central Government Service next year. There will be good amount of savings by way of retirement benefit and General Provident Fund by that time. And I will be migrating to USA immediately thereafter to join my family there. I want to repatriate the amount over to USA. What is best way out?

I will continue to get pension every month. Can I repatriate that also?

Reply

Sudha June 12, 2013 at 7:34 PM

Hi there,

(1) what is the difference between NRI and NRO
(2) how does the NRI account work if you have dual citizenship – say Indian passport and Australian passport
(3) How easy or difficult is it to withdraw cash from the NRI account and convert to origin currency. for eg: If I am staying in Oman and I repatriate the amount to India and for some emergency I want to withdraw cash in OMR- does an NRI account allow this.

Kindly advice.

regards
SR

Reply

Manshu June 14, 2013 at 2:43 AM

Hi Sudha,

1. There is no such thing as a NRI account. There is NRE and NRO. Right now, the fixed deposits on NRE accounts are tax free but not on NRO so you are better off using a NRE account.

2. The account is no different, you need the same paperwork etc. If you contact a bank they have the whole list of documents. I have a post somewhere here too that describes all the documentation needed.

3. I’m not able to answer this question as I’ve never done it. The process is clearly laid out but I have no practical experience with this. Can anyone else answer this please?

Reply

PP June 15, 2013 at 1:14 PM

Hi Sudha,

I’m really not sure if one can hold an Indian passport along with passport of some other country. My understanding is that once you get a non-Indian passport, your Indian citizenship and thus the Indian passport automatically terminates. There is no such thing as “dual citizenship”, however, there are OCI and PIO cards which are essentially multiple entry visas to India for a long period of time (15 to 25 years), issued to foreign nationals of Indian origin. Please correct me if my knowledge is not up-to-date.

NRE/NRO account are for Indian citizens staying/earning abroad. The basic difference between the two accounts is that you can fund NRE with foreign currency only and NRO with Indian rupees only. As far as I know, both accounts are repatriable, meaning you can withdraw your money outside India in foreign currency. However, you’ll have to bear the conversion loss – for example, if 1USD = 55 Rs, banks will roughly buy at Rs54 and sell at Rs56. Apart from that you’ll also need to consider the income tax implication.

Thanks!

Reply

suresh babu July 23, 2013 at 3:22 PM

Hi Sudha,

There are two ways to bring back the money to the foreign country.
(1) You can wire transfer / Online transfer your NRE account balance into any currency account like any other normal transfers.
(2) You can use your International ATM / Debit Card ( NRE ) and draw money in any country.

For money lying in your NRO Account, there is a way to bring it outside the country by paying Income tax on it. Contact your CA for more details on it.

Hope this info is useful.

REgards
Suresh Babu

Reply

Nik June 17, 2013 at 10:05 PM

I am concern about bringing money back from NRE. I have account in HSBC NRE but it is not easy to bring money back to US from NRE.

What are easiest options with other banks. Which bank is best in service for NRE?

Reply

Priyank Shah July 22, 2013 at 10:40 AM

Hi,
I was wondering, is there a limit to how much money you can have in an NRE account? Someone was saying its not wise to keep more than 10000 dollars in there. Does that mean I should open multiple NRE accounts to store multiples of 10000 dollars? Like 10K in ICICI, 10k in HDFC, etc….

Reply

PP July 23, 2013 at 12:08 AM

Hi Priyank,

Although NRE account can only be funded through foreign currency, it can retain money in Indian rupees only (which is repatriable). Thus, you cannot keep money in it in dollars.

Currently NRE accounts offer decent rate of interest which is non-taxable. I think there is no reason to believe that depositing higher volumes in your NRE is not wise, unless you know of a better avenue with higher rate of return.

– PP

Reply

daryn November 11, 2013 at 12:53 PM

Hello, ive just opened an nre account and was wondering whether i can withdraw the money like a normal savings account would permit me to … or will i be taxed or something ? and another question; when i earm foreign currency, can i leave it as it is .i.e without having to convert it into indian rupees, and if i do that, then how will i be able to withdraw the money ? can foreign exchange be withdrawn like how we normally withdraw cash from an atm ? or do we need to do it the old fashioned way ? Please let me know .. 😛

Reply

LLAP February 4, 2014 at 4:46 PM

Can I not transfer money from a foreign account to a normal India saving account? Do I absolutely need NRE/NRO? What is the benefit of NRE over normal saving account?
I have not tried, but I believe websites like xoom.com allows clients to send money to a saving account in India that is not necessarily an NRE/NRO.
Thank you

Reply

vinod mehta March 27, 2014 at 3:59 PM

I would like to know regarding safety and security for NRE/NRO accts and more specifically would like to know risk coverages by Law/ Government of India, in event of Banks default

Reply

Kumar September 5, 2014 at 4:01 PM

Hi I am in Netherlands.I haven’t open NRI account yet. But I am using my friend NRI account to transfer my local Euro currency to Indian rupees for time being. Is there any advantage or disadvantages as if I use others NRI account.pls clarify

Reply

sureshbabu October 24, 2014 at 4:36 PM

Hi,
I am an NRE account holder. I have also NRO account. Planing to sell my flat in mumbai, how much cash i can deposit in my NRO account at one time.
Thank you

Reply

AR November 10, 2014 at 2:51 PM

Is it possible to whatever the amount withdrawn from the NRE account in India, deposit-able back to the same NRE account?

Reply

himanshu February 10, 2015 at 2:31 AM

hello,
i want to ask that if a nri come back and start working in India and doesn’t close his nre account in India, then can he keep that account as it is as he may go again to foreign country in next few year for work. please tell me for how long a person can keep his /her nre account active after coming back to India..
thank you

Reply

Anand February 10, 2015 at 2:30 PM

Which is the safest as in capital safety & monthly payment-:pomis vs bank fd for ex: if pomis is 100% safe then wat percentage ud rate bank fd? Plz advice as im planning to put all my hard earned money for a monthly income… Is it a wise decision??
Thanx & regards

Reply

Mel February 17, 2015 at 11:59 PM

I can answer some questions here generally.
Safety: your money will be with the bank. The bank will give out loans to the general public. If the loans are repaid, all is well and you will get your interest. If the loans are not paid back and the bank is in trouble, RBI has 2 options.
1. merge the bank with a bigger bank- all deposits are then safe. The interest may be reduced.
2. Let the bank fail- all deposits higher than 1 lakh Rs are lost since that is the insurance limit in india.
Another angle is the exchange rate. If USD inr rate goes from 62 to 65, your nre value is reduced by more than 3%. In effect you will get say 9 – 4= 5% and pay US taxes 30%. So you will gain only 3.5%.

Reply

Peter October 21, 2015 at 10:09 AM

Hi
I am surprised you guys did not touch upon more important issues:
If u open nre fd 1 crore, 8% intrest =80 lakh.
This means you will need to file tax return every year to get interest pre-deducted by the ATO through your bank. nre is tax free but u gotta claim tax back through tax return. This might be a hassle fellas.
Any input ?

Reply

Ashfaq June 27, 2016 at 6:21 PM

8% of 1Cr is 8 Lakhs… not 80…

Reply

Srik February 15, 2016 at 5:49 PM

NRE – can deposit and withdraw from foreign country, only withdrawals allowed from India, no deposits allowed from India

NRO – only deposits allowed from outside India, withdrawal not allowed from outside. Can deposit and witdraw from india.

NRE completely tax free.

NRO taxed on income/interest

So depending on ur need you can open the account

Reply

Sudha September 1, 2016 at 10:22 PM

Hi,
My husband is having multiple NRI accounts in 2 different banks in Bangalore. I want him to open an exclusive account in hyderabad which is my home town. Is it possible for him to open an account say SBI wherein I also have an account? We are staying outside India. Kindly let me know the pre requisites. Thank you in advance.

Sudha

Reply

Leave a Comment

Previous post:

Next post: