New Delhi: Non-Resident Indians (NRIs) can transfer eligible funds from a Non-Resident Ordinary (NRO) account to a Non-Resident External (NRE) account, but the facility is subject to foreign exchange rules, applicable taxes and documentation requirements.
The Reserve Bank of India (RBI) permits such transfers within an overall USD 1 million limit per financial year, which runs from April to March. The same limit also applies to eligible remittances from NRO balances to overseas accounts, subject to the applicable conditions.
The transfer can be useful for NRIs who want to move eligible Indian funds into an NRE account, where interest is generally exempt from Indian income tax for individuals who qualify as NRIs under the applicable FEMA rules.
However, transferring money from NRO to NRE does not automatically make the underlying income tax-free. The source of the funds and any applicable tax liability have to be addressed before the transfer.
What are NRO and NRE accounts?
An NRO account is primarily used by NRIs to manage income earned in India. This can include rent, dividends, pension receipts and interest income.
Interest earned on NRO deposits is taxable in India and is generally subject to applicable tax deduction at source (TDS).
An NRE account, on the other hand, is designed to hold foreign earnings in Indian rupees. For an account holder who qualifies as an NRI under the applicable FEMA rules, interest earned on an NRE account is exempt from Indian income tax.
The accounts also differ in terms of repatriation. NRE balances are generally fully repatriable, while NRO balances are subject to specified conditions and limits.
This difference is one reason NRIs may choose to transfer eligible money from an NRO account to an NRE account.
How much money can be transferred from NRO to NRE?
An NRI can transfer eligible funds from an NRO account to an NRE account within the overall USD 1 million per financial year limit.
The financial year is from April to March. The NRO-to-NRE transfer is counted within this overall limit rather than being treated as an additional facility over and above the permitted remittance limit.
For example, if an NRI has already used part of the permitted NRO remittance facility during a financial year, the remaining eligible amount available for transfer will be correspondingly lower.
The actual amount that can be transferred can also depend on the nature and source of the funds and whether all required taxes and documentation have been completed.
Is NRO to NRE transfer allowed?
Yes. NRO-to-NRE transfers are permitted under FEMA rules, subject to the prescribed conditions.
The transfer should not be confused with transferring money from an ordinary resident savings account directly into an NRE account. An NRO account is specifically designed for NRIs to hold eligible income and funds connected with India.
NRIs can also transfer money between NRE accounts, while overseas earnings can generally be deposited into an NRE account.
The important point is that the NRO-to-NRE facility remains subject to the applicable foreign exchange and tax compliance requirements.
What is the tax treatment?
Tax treatment is an important consideration before moving money from an NRO account to an NRE account.
Interest earned on an NRO deposit is taxable in India and may be subject to TDS. Moving the balance to an NRE account does not retrospectively change the tax treatment of income that was already taxable.
After eligible funds are transferred, interest earned in the NRE account is exempt from Indian income tax for an account holder who qualifies as an NRI under the relevant FEMA rules.
However, NRIs should also consider the tax rules of the country where they are resident for tax purposes. A transfer that is exempt from Indian income tax does not necessarily mean that the income or interest will be tax-free in another country.
Therefore, the tax benefit associated with an NRE account should not be interpreted as a blanket exemption from taxation in every jurisdiction.
What documents are required?
Banks can require NRIs to establish the source of funds, confirm that applicable taxes have been paid and provide information about the purpose of the transfer.
According to the NDTV Profit report, the documentation can include Form 145, an online declaration submitted to the Income Tax Department confirming that the required taxes have been deducted or paid.
Under the new framework, Form 145 contains different sections depending on whether the remittance is taxable and the relevant threshold.
If a taxable remittance exceeds Rs 5 lakh and the applicable conditions are met, a Chartered Accountant’s certificate in Form 146 may also be required.
Banks may additionally ask for:
- Proof showing the source of funds
- Details of the underlying income or transaction
- Evidence that applicable taxes have been paid
- Required declarations under FEMA
- Other documents prescribed by the bank for processing the transfer
The exact paperwork can vary depending on the nature of the funds and the bank involved.
Does the USD 1 million limit apply every year?
Yes. The limit is applicable on a financial-year basis, meaning April 1 to March 31.
This is important because the limit does not operate as a lifetime ceiling. Eligible NRO funds can be remitted or transferred in subsequent financial years, subject to the rules and limits applicable during those years.
However, the USD 1 million figure should not be interpreted as an automatic entitlement to transfer any amount from an NRO account. The funds must be eligible for remittance and the prescribed tax and documentation conditions must be satisfied.
Why do NRIs transfer money from NRO to NRE?
The two accounts serve different purposes, so the decision to transfer funds can depend on an NRI’s financial requirements.
An NRO account is useful for managing income generated in India. However, NRO deposit interest is taxable in India, and repatriation of funds is subject to prescribed limits and conditions.
An NRE account, meanwhile, offers full repatriability in general circumstances and tax-exempt interest in India for qualifying NRIs under the applicable rules.
Consequently, an NRI who has accumulated eligible funds in an NRO account may consider transferring them to an NRE account, provided the transaction meets the applicable FEMA, tax and banking requirements.
What NRIs should check before making the transfer
Before initiating an NRO-to-NRE transfer, NRIs should verify the following:
1. Source of funds: The bank may require documentation establishing where the money came from.
2. Tax compliance: Any tax payable on the underlying income should be addressed before the transfer.
3. Annual limit: Check how much of the USD 1 million financial-year limit has already been used.
4. Documentation: Confirm whether Form 145, Form 146 or other documents are required for the specific transaction.
5. Overseas tax rules: If the NRI is a tax resident of another country, the tax treatment there should also be checked.
6. Bank requirements: Individual banks may request additional declarations or supporting documents before processing the transaction.
NRO to NRE transfer is not the same as a tax exemption
One of the most important distinctions for NRIs is that the transfer itself and the taxability of the underlying income are separate issues.
For instance, if an NRO account contains rental income on which tax is applicable, transferring the remaining eligible balance to an NRE account does not eliminate the tax liability associated with that rental income.
The tax exemption associated with NRE accounts primarily applies to interest earned on the NRE deposit for an eligible NRI under the relevant rules.
This distinction is particularly important when large amounts are transferred, as banks may seek evidence that the source of funds and tax obligations have been properly addressed.
Conclusion
NRIs can transfer eligible funds from an NRO account to an NRE account, subject to FEMA requirements and the overall USD 1 million per financial year limit. The transfer also has to comply with applicable tax and documentation requirements.
While NRE interest is generally exempt from Indian income tax for qualifying NRIs, the exemption does not change the tax treatment of income that was already earned and taxable in India. NRIs should therefore establish the source of funds, complete applicable tax compliance and provide the required documentation before making the transfer.
The rules can also interact with the tax laws of the country where an NRI resides. For sizeable transactions, checking the requirements with the bank and a qualified tax professional can help ensure that both Indian and overseas obligations are addressed.