Avoid common mistakes in NRO, NRE accounts: A guide for NRIs

Tips on using NRE and NRO accounts to effectively manage funds, repatriate money and remain tax-compliant

- Aprajita Sharma

Non-resident Indians (NRIs) receive or send money to India quite often, and usually open a non-resident ordinary (NRO) or non-resident external (NRE) bank account, or both. But a lack of understanding of their correct use may spell trouble. We lay out the key features of both accounts, common mistakes that NRIs make, and a few tips that you can follow.

Assume Mr. A is an NRI based in the US and his father wants to send him ₹10 lakh from India. So, a resident Indian can only send money to an NRI's NRO account.

It cannot go in the NRE account because even though NRE is a rupee-denominated account, funds deposited in it must originate from foreign sources. The transaction will fail if you send money to an NRE account from India.

Sending money to an NRO account is simple, but the purpose of transfer holds the key to getting it right. Some transactions may fall under the Liberalised Remittance Scheme (LRS).

"A resident individual can transfer INR funds into an NRO account online - subject to the maximum INR transfer limit set in your netbanking - or offline. However, if a resident Indian who is a close relative (as defined in Section 6 of the Companies Act, 2013) sends some money to an NRI as a gift or loan, it falls under that person's annual LRS limit," said a senior banking executive who is not authorised to talk to media. It means Mr. A's father will have to declare that Rs 10 lakh transfer to his son is not breaching his annual LRS limit.

However, if a resident sends rental income, buys a property or pays off a loan to an NRI, it will not be an LRS transaction.

Keeping the transfer within the annual LRS limit is, however, not enough. All LRS transactions above ₹7 lakh attract tax collected at source (TCS) at 0.5% to 20% depending on the purpose of the transfer. This means if Mr. A's father transfers ₹10 lakh to his son's NRO account, the bank should apply 20% TCS and transfer only ₹8 lakh.