NRI Banking

1. Definition and Scope of NRI Business

  • NRI (Non-Resident Indian): An NRI is an individual who is either an Indian citizen or a Person of Indian Origin (PIO) residing outside India for employment, business, or any other purpose.
  • NRI Business: Refers to the banking services and financial products that are specifically designed for NRIs, enabling them to manage their financial needs both in India and abroad.
  • This includes services like remittances, account management, and investment opportunities.

2. Regulatory Framework

2.1 Foreign Exchange Management Act (FEMA), 1999: Regulates all financial transactions involving foreign exchange, covering capital and current account transactions.

The main goals of FEMA are:

  • To make life easier for international trade and payments: It simplifies the rules for buying and selling goods and services from other countries.
  • To manage India’s foreign exchange reserves: It helps in maintaining a healthy balance of foreign currency, which is vital for the country’s economic stability.
  • To create a transparent and investor-friendly environment: By having clear regulations, FEMA encourages foreign investment in India.

Current vs. Capital Account Transactions: The Golden Rule

At the heart of FEMA lies the distinction between two types of transactions.

  • Current Account Transactions: These are your everyday, routine transactions. They don’t create assets or liabilities abroad. Think of them as your daily expenses.
    • Examples: Payments for imports/exports, travel for business or leisure, education abroad, medical treatment, sending gifts, and interest payments on loans.
    • The Rule to Remember: All current account transactions are freely permitted, unless specifically restricted or prohibited. The government, in consultation with the RBI, can impose reasonable restrictions in the public interest.
  • Capital Account Transactions: These are transactions that create or change your assets or liabilities outside India (if you are a resident in India) or in India (if you are a person resident outside India). Think of these as long-term investments.
    • Examples: Investing in foreign property or shares, receiving foreign investments, and foreign loans.
    • The Rule to Remember: All capital account transactions are prohibited, unless specifically permitted. The RBI has the power to specify which capital account transactions are permissible.

Tip: Remember the golden rule: Current account transactions are generally allowed, while capital account transactions are generally restricted.

Key Players and Their Roles

It’s important to know who does what under FEMA:

  • Reserve Bank of India: The RBI is the primary regulator. It manages foreign exchange reserves and has the power to regulate capital account transactions. It also authorizes “Authorised Persons” to deal in foreign exchange.
  • Central Government: The Central Government sets the overall policy framework for FEMA and can restrict certain current account transactions in the public interest.
  • Authorised Person (AP): An AP is an entity authorized by the RBI to deal in foreign exchange. This includes authorized dealers (like Banks), money changers, and offshore banking units. All foreign exchange transactions must be routed through an AP.
  • Enforcement Directorate (ED): The ED is the main agency for investigating violations of FEMA.

Important Sections for Your Exam

Key sections will give you an edge:

  • Section 2: Provides definitions of important terms like “capital account transaction,” “current account transaction,” “person resident in India,” and “authorised person.”
  • Section 3: Prohibits dealing in or transferring any foreign exchange or foreign security to any person not being an authorised person.
  • Section 4: Restricts residents from acquiring, holding, owning, possessing, or transferring any foreign exchange, foreign security, or any immovable property situated outside India, except as provided in the Act.
  • Section 5: Deals with current account transactions, stating they are permissible unless restricted.
  • Section 6: Deals with capital account transactions, giving the RBI the power to specify permissible transactions.
  • Section 10: Outlines the duties and liabilities of authorised persons.
  • Section 13: Details the penalties for contravention of the Act.
  • Section 15: Provides for the compounding of offenses, which is a process to settle a contravention by paying a monetary penalty.

Penalties and Compounding: What Happens When Rules are Broken?

Understanding the consequences of non-compliance is a common topic.

  • Penalty: If anyone contravenes any provision of FEMA, they can be liable to a penalty of up to three times the sum involved in the contravention if the amount is quantifiable. If the amount is not quantifiable, the penalty may be up to two lakh rupees. For continuing contraventions, a further penalty of up to five thousand rupees for every day may be levied.
  • Compounding of Contraventions: FEMA allows for the settlement of contraventions through a process called compounding. This is a voluntary process where the person who has committed the contravention can apply to the RBI to have the offense compounded. If the RBI agrees, a monetary penalty is paid, and the matter is closed without further legal proceedings. This is a faster and less cumbersome way of resolving contraventions.

Recent Developments to Keep in Mind

For a contemporary edge in your answers, be aware of recent trends and amendments:

  • Liberalised Remittance Scheme (LRS): This scheme allows resident individuals to remit up to a certain amount (currently USD 250,000 per financial year) for permissible current and capital account transactions.
  • Focus on Ease of Doing Business: Recent amendments have often aimed at simplifying compliance and promoting foreign investment.
  • Changes in Reporting: There are continuous updates to the reporting requirements for various transactions to enhance transparency.
  • Reserve Bank of India Regulations: RBI governs foreign exchange transactions and cross-border remittances.

3. NRI Accounts and Types

NRE (Non-Resident External) Accounts:

An NRE Account is a special type of bank account in India that can be opened by a Non-Resident Indian (NRI) or a Person of Indian Origin (PIO).

Think of it as a gateway for NRIs to park their foreign earnings in India. You deposit money in a foreign currency, and the bank converts it into Indian Rupees (INR) at the prevailing exchange rate. The account is then maintained in Indian Rupees.

The primary purpose of an NRE account is to allow NRIs to conveniently hold and manage their foreign income in India.

Key Features and Benefits of an NRE Account

Here are the most important features, which are also its biggest advantages:

  • Tax-Free Interest: This is the most significant benefit. The interest you earn on the balance in your NRE account is completely exempt from income tax in India.
  • Fully Repatriable: “Repatriable” means you can freely transfer the money back to your country of residence or any other foreign country. Both the principal amount you deposited and the interest you earned can be transferred abroad without any hassle or need for special permissions.
  • Deposit in Foreign Currency, Maintain in Indian Rupees: You initiate deposits into this account by sending foreign currency from abroad (like USD, GBP, EUR, etc.). The bank converts this into INR, and that’s the currency your account is held in.
  • Joint Holding is Possible: An NRI can open an NRE account jointly with another NRI. It can also be held jointly with a close resident relative (as specified by the RBI), but in this case, the account operates on a “former or survivor” basis. This means the resident relative can only access the funds after the death of the primary NRI account holder.
  • Variety of Account Types: You can open an NRE account as a savings account, a current account for business purposes, or as a fixed deposit (term deposit) to earn higher interest rates.
  • Easy to Make Local Payments: You can use the funds in your NRE account to make payments in India, such as for family maintenance, investments, or shopping.

How is it Different from an NRO Account?

FeatureNRE (Non-Resident External) AccountNRO (Non-Resident Ordinary) Account
Primary PurposeTo park foreign earnings in India.To manage income earned in India (e.g., rent, pension).
Taxation of InterestInterest earned is Tax-Free.Interest earned is Taxable in India.
RepatriabilityFreely and fully repatriable (both principal and interest).Restricted Repatriation. You can only remit up to USD 1 million per financial year (after paying taxes).
DepositsOnly from inward remittances from abroad (foreign currency).Can be from abroad or from Indian sources (e.g., rent credited in INR).
Joint HoldingCan be held with another NRI or on a ‘former or survivor’ basis with a resident relative.Can be held jointly with a resident Indian on a ‘former or survivor’ or ‘either or survivor’ basis.

Who is Eligible to Open an NRE Account?

You are eligible to open an NRE account if you are a:

  • Non-Resident Indian (NRI): An Indian citizen who resides in a foreign country for employment, business, or any other purpose indicating an indefinite stay abroad.
  • Person of Indian Origin (PIO): A foreign citizen (except for citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, or Bhutan) who has held an Indian passport at any time, or whose parents or grandparents were citizens of India.
  • Students studying abroad are also considered NRIs and can open NRE accounts.

FCNR Accounts:

An FCNR account, which stands for Foreign Currency Non-Resident, is a type of term deposit account that can be opened in India by NRIs and Persons of Indian Origin (PIOs).

The single most important feature of an FCNR account is that it allows you to save your foreign earnings in the same foreign currency. This means if you deposit US Dollars, the account is maintained in US Dollars. If you deposit British Pounds, it’s maintained in British Pounds.

Think of it as a foreign currency fixed deposit in an Indian bank. This protects your money from the risk of exchange rate fluctuations between the Indian Rupee (INR) and the foreign currency.

How Does it Work?

  1. Deposit: An NRI sends foreign currency from their country of residence to be deposited into their FCNR account in India.
  2. Maintenance: The Indian bank holds this deposit in the same foreign currency it was received in. For example, if you send $10,000, your account is credited with $10,000. It is not converted into Indian Rupees.
  3. Interest: The bank pays you interest in the same foreign currency. So, on your $10,000 deposit, you will earn interest in US Dollars.
  4. Maturity: When the deposit matures, you receive the principal and the accrued interest in that foreign currency. You can then choose to transfer it back to your country of residence or convert it to INR at that time.

Key Features and Benefits of an FCNR Account

This is a favourite for many NRIs, especially for lump-sum investments, due to these powerful benefits:

  • Protection from Exchange Rate Risk: Since the account is maintained in a foreign currency, you are completely shielded from the risk of the Indian Rupee depreciating against your home currency. Your money’s value remains stable in its original currency.
  • Tax-Free Interest: Just like an NRE account, the interest earned on your FCNR deposit is completely exempt from income tax in India.
  • Fully Repatriable: The entire maturity proceeds (both the principal amount and the interest) are fully and freely repatriable. You can transfer the funds abroad without any restrictions or special permissions.
  • Term Deposit Only: FCNR accounts are only offered as term deposits (or fixed deposits). You cannot open a savings account under the FCNR facility.
  • Specific Currencies: These accounts can be opened in several major global currencies. The RBI permits banks to accept FCNR deposits in currencies like the US Dollar (USD), Pound Sterling (GBP), Euro (EUR), Japanese Yen (JPY), Canadian Dollar (CAD), Australian Dollar (AUD), and others.
  • Loan Facility: You can avail loans in Indian Rupees against the security of your FCNR deposit for use in India.

FCNR vs. NRE vs. NRO: A Quick Comparison

This table will help you understand the key differences at a glance:

FeatureFCNR AccountNRE AccountNRO Account
Account CurrencyForeign Currency (e.g., USD, GBP, EUR)Indian Rupee (INR)Indian Rupee (INR)
Primary BenefitProtection from currency fluctuationTax-free interest earningsManages India-based income
Type of AccountTerm Deposit (Fixed Deposit) OnlySavings, Current, or Term DepositSavings, Current, or Term Deposit
Tax on InterestTax-FreeTax-FreeTaxable
RepatriabilityFreely and Fully RepatriableFreely and Fully RepatriableRestricted Repatriation
Main PurposeTo protect a lump sum of foreign earnings from exchange rate risk.To park foreign earnings in India and earn tax-free interest.To manage income earned within India (e.g., rent, pension).

Important Rules to Remember

  • Tenure: FCNR deposits must be made for a specific term. The minimum tenure is 1 year, and the maximum is 5 years.
  • Premature Withdrawal: Premature withdrawal is permitted. However, if the deposit is withdrawn in less than one year, no interest is paid. If withdrawn after one year but before maturity, the interest is paid at a lower rate, subject to a penalty.

4. NRI Banking Services

  • NRIs can open NRE, NRO, and FCNR accounts with Indian banks.
  • The account opening process can be done online or through branches and business correspondents (BCs).
  • Transaction Services:
    • Remittance Services: NRIs can remit money to India and send money internationally through RTGS, NEFT, and SWIFT.
    • Loan Services: NRIs can avail home loans, personal loans, and business loans from banks in India.
    • Investment Products: NRIs can invest in mutual funds, stocks, and fixed deposits in India, subject to regulatory guidelines.

5. NRI Investment Options

As a Non-Resident Indian (NRI), a world of investment opportunities in India is open to you, offering a unique chance to benefit from one of the world’s fastest-growing economies and stay connected to your roots.

1. Indian Stock Market

Investing in the Indian stock market allows one to participate directly in the country’s growth story. NRIs can invest in two primary ways:

a) Direct Equity (Stocks)

NRIs can directly purchase shares of companies listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

  • How to Invest:
    1. Bank Accounts: You need a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank account.
    2. Portfolio Investment Scheme (PIS): NRIS must have a PIS account with a designated bank branch to invest in the secondary stock market. This is not required for investing in IPOs or mutual funds.
    3. Demat and Trading Account: Open a Demat account (to hold shares electronically) and a Trading account (to place buy/sell orders) with a registered Indian broker.
  • Key Regulations (FEMA):
    • NRIs can only make delivery-based trades; intraday trading is not permitted.
    • Overall NRI investment in a single Indian company is capped at 10% of its paid-up capital, which can be raised to 24% if the company’s general body approves.
  • Taxation:
    • Short-Term Capital Gains (STCG): If shares are sold within 12 months, gains are taxed at a flat rate of 15%.
    • Long-Term Capital Gains (LTCG): If shares are sold after 12 months, gains over ₹1 lakh in a financial year are taxed at 10%.
  • Repatriation: Investments made through an NRE account are fully repatriable (both principal and gains). Investments via an NRO account are subject to certain limits and conditions for repatriation.

b) Mutual Funds

A convenient way to diversify your portfolio without in-depth market knowledge. Professional fund managers handle the investments.

  • How to Invest:
    • You can invest using your NRE or NRO account.
    • Complete the KYC (Know Your Customer) process.
    • Note: NRIs based in the USA and Canada may face restrictions from some Indian fund houses due to stringent FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) compliance requirements.
  • Types of Funds: NRI can invest in equity funds, debt funds, hybrid funds, and even tax-saving funds (ELSS).
  • Taxation:
    • Equity Funds: Same as direct equity (15% STCG, 10% LTCG over ₹1 lakh).
    • Debt Funds: Gains are now added to your income and taxed at your applicable income tax slab rate. The benefit of indexation for long-term gains has been removed since April 1, 2023.
  • Repatriation: Fully repatriable if the investment was made through an NRE account.

2. Real Estate

Owning property in India is a popular choice for NRIs, driven by both financial returns and an emotional connection.

  • What You Can Buy: NRIs can freely purchase residential and commercial properties.
  • What You Cannot Buy: Agricultural land, plantation property, and farmhouses cannot be purchased. They can only be acquired as a gift or inheritance.
  • Funding: Payments must be routed through NRE/NRO/FCNR accounts or via inward remittance from abroad. Home loans are also available for NRIs from Indian banks.
  • Key Regulations: The Real Estate (Regulation and Development) Act, 2016 (RERA) has significantly improved transparency and accountability in the sector.
  • Taxation:
    • Rental Income: Taxed at slab rates after a standard deduction of 30%. The tenant is required to deduct TDS at 30% before paying the rent.
    • Capital Gains:
      • STCG: If the property is sold within 24 months, the gain is taxed at your income tax slab rate.
      • LTCG: If sold after 24 months, the gain is taxed at 20% with indexation benefits.
  • Repatriation: Repatriation of sale proceeds is allowed up to USD 1 million per financial year.

3. Fixed Income Investments

For those with a lower risk appetite, these options offer stability and predictable returns.

a) Bank Fixed Deposits (FDs)

  • NRE FD: Principal and interest are tax-free in India and fully repatriable. The deposit is made in foreign currency and converted to INR.
  • NRO FD: Interest earned is taxable at slab rates (plus surcharge and cess), and subject to TDS. Repatriation from an NRO account is restricted.
  • FCNR (B) Account: This is a term deposit maintained in a foreign currency (like USD, EUR, GBP). The principal and interest are tax-free and fully repatriable. It also protects you from currency exchange rate fluctuations.

b) Bonds and Debentures

NRIs can invest in government securities (G-Secs), Public Sector Undertaking (PSU) bonds, and corporate non-convertible debentures (NCDs). These offer fixed interest payments and are considered relatively safe. The interest earned is generally taxable.

4. National Pension System (NPS)

A government-backed, long-term retirement savings scheme now open to NRIs.

  • Eligibility: NRIs aged between 18 and 70 can open an NPS account. An active NRE or NRO account is required.
  • How it Works: You contribute to a pension fund that invests in a mix of equity and debt. Upon maturity (age 60), you can withdraw up to 60% of the corpus as a tax-free lump sum. The remaining 40% must be used to purchase an annuity (pension plan).
  • Tax Benefits:
    • Deduction up to ₹1.5 lakh under Section 80C.
    • Additional exclusive deduction of ₹50,000 under Section 80CCD(1B).
  • Repatriation: Proceeds are credited to the NRE/NRO account and repatriation is governed by the rules of that account.
  • Important Note: The NPS account must be closed if your citizenship status changes.

5. Public Provident Fund (PPF)

  • For Existing Account Holders: If you had a PPF account as a resident Indian, you can continue to contribute to it until maturity (15 years). The interest remains tax-free.
  • New Accounts: NRIs are not permitted to open new PPF accounts.

Key Considerations for All NRI Investments

  • Double Taxation Avoidance Agreement (DTAA): India has DTAA with over 90 countries. This treaty ensures you don’t pay tax on the same income in both your country of residence and India. You can claim tax relief in either of the countries.
  • Power of Attorney (PoA): If you cannot be physically present in India to manage your investments, you can appoint a trusted person as your PoA to execute transactions on your behalf.
  • Stay Updated: Regulations under FEMA and tax laws are subject to change. It is advisable to consult with a financial advisor or a chartered accountant to make informed decisions tailored to your financial goals and risk profile.

6. Taxation on NRI Accounts

  • Tax Exemption on NRE Accounts: The income earned in NRE accounts is tax-free in India, and there is no wealth tax on these accounts.
  • Tax on NRO Accounts: The interest earned on NRO accounts is subject to TDS (Tax Deducted at Source) at a rate of 30%. However, NRIs can avail benefits under the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence.
  • Filing Returns: NRIs are required to file their income tax returns if they have taxable income in India, even if they are not residents.

7. Remittances and Foreign Exchange Management

  • Liberalized Remittance Scheme (LRS):
    • Under this scheme, Indian residents can remit up to USD 250,000 per financial year for various purposes, including personal expenses, education, and travel.
    • NRIs can also send remittances to their family members in India.
  • Foreign Currency Exchange:
    • NRIs can avail foreign exchange services through banks and money changers.
    • Banks provide travel cards, currency exchange, and wire transfer services for NRIs.

8. NRI Business and Trade

  • Foreign Direct Investment (FDI): NRIs can invest in Indian companies, both listed and unlisted, and are eligible to hold equity shares, provided they follow the regulations for FDI.
  • Export and Import: NRIs engaged in trade can open export and import businesses and use their NRE/NRO accounts for business operations.

9. Rights and Restrictions for NRIs

  • NRI Joint Accounts:
    • NRIs can open joint accounts with another NRI or a resident relative.
    • These accounts are subject to the ‘former or survivor’ rule, meaning the account can be operated by any one person during their lifetime.
  • Voting Rights: NRIs are not allowed to vote in local elections in India, but they can participate in General Elections by casting their votes by postal ballot.

10. Legal Framework for NRI Business

  • Legal Requirements:
    • NRIs must comply with laws such as FEMA and the Companies Act when conducting business in India.
    • Compliance with taxation and repatriation (देश-प्रत्यावर्तन) regulations is essential to avoid legal complications.
  • Inheritance Laws:
    • NRIs are subject to Indian succession laws for inheritance matters.
    • Hindu Undivided Families (HUF) may also be affected by specific inheritance laws.

11. NRI Services by Banks

  • Special NRI Banking Products:
    • Banks offer specialized products such as NRI accounts, NRI loans, and investment schemes designed to cater to the unique needs of NRIs.
  • Online Services:
    • Most banks provide online banking and mobile apps that allow NRIs to manage their accounts, pay bills, transfer funds, and invest without being physically present in India.

12. Challenges in NRI Business

  • Currency Fluctuations: Changes in exchange rates affect the value of remittances and investments.
  • Regulatory Hurdles: Compliance with both Indian and international regulations, especially in areas like taxation and foreign exchange, is complex for NRIs.
  • Documentation: The requirement for physical documentation and verification of NRI status may be cumbersome at times.

Multiple Choice Questions

1. What is the primary purpose of an NRE account?
A) To deposit income earned in India
B) To deposit income earned abroad
C) To store foreign currency in physical form
D) To hold funds that cannot be repatriated

B) To deposit income earned abroad

2. Which of the following accounts is taxable in India?
A) NRE Account
B) NRO Account
C) FCNR Account
D) All of the above

B) NRO Account

3. Under FEMA, who qualifies as an NRI?
A) Any Indian citizen residing outside India for work or business
B) Only Indian citizens residing abroad permanently
C) Foreign nationals working in India
D) Persons with a Green Card

A) Any Indian citizen residing outside India for work or business

4. What is the maximum remittance limit for NRIs under the Liberalized Remittance Scheme (LRS)?
A) USD 100,000
B) USD 200,000
C) USD 250,000
D) USD 500,000

C) USD 250,000

5. What is the repatriation limit for NRO accounts per financial year?
A) USD 50,000
B) USD 1,00,000
C) USD 1,000,000
D) No limit

C) USD 1,000,000

6. Which of the following accounts can be maintained in foreign currency?
A) NRE Account
B) NRO Account
C) FCNR Account
D) All of the above

C) FCNR Account

7. Which tax benefit is applicable to NRE accounts?
A) Full exemption from tax on principal and interest
B) Tax on interest only
C) Tax deduction at source (TDS) applies
D) Wealth tax applies

A) Full exemption from tax on principal and interest

8. Which of the following investments can NRIs make in India?
A) Purchase agricultural land
B) Invest in Indian mutual funds
C) Open recurring deposit accounts in foreign banks
D) Purchase prohibited government bonds

B) Invest in Indian mutual funds

9. What is the minimum tenure for an FCNR account?
A) 1 year
B) 3 months
C) 6 months
D) 5 years

A) 1 year

10. Which of the following services can a joint holder (resident relative) perform on an NRI’s account?
A) Deposit and withdraw funds freely
B) Operate as Power of Attorney (PoA) holder for specified tasks
C) Open new NRI accounts
D) Close the account without consent

B) Operate as Power of Attorney (PoA) holder for specified tasks

11. What is the main regulatory framework governing NRI accounts and transactions?
A) Companies Act, 2013
B) Reserve Bank of India Act, 1934
C) Foreign Exchange Management Act, 1999 (FEMA)
D) Income Tax Act, 1961

C) Foreign Exchange Management Act, 1999 (FEMA)

12. Interest earned on which account is tax-free in India?
A) NRO Account
B) Savings Account
C) NRE Account
D) Fixed Deposit in Resident Account

C) NRE Account

13. What type of joint account can an NRI open with a resident relative?
A) Joint ownership account
B) Former or survivor basis account
C) Business joint account
D) Corporate account

B) Former or survivor basis account

14. Which of the following is NOT a permissible debit in an NRO account?
A) Payment of local taxes
B) Repatriation of funds abroad beyond USD 1 million
C) Local utility bill payments
D) Investments in Indian companies

B) Repatriation of funds abroad beyond USD 1 million

15. What is the TDS rate applicable for interest earned on NRO accounts?
A) 10%
B) 20%
C) 30%
D) No TDS applies

C) 30%