NRIs (Non-resident Indians) manage their funds in India via two accounts, namely the NRE account and the NRO account.
So, let us first understand what these two accounts are.
An NRE is a Non-Resident External Account that helps you handle the money you make outside of India. In the case of an NRE account, the interest you earn is free from taxes.
An individual has the right to transfer the principal and interest earned on that amount through the NRE account to the individual's foreign bank account.
An NRO stands for Non-Resident Ordinary Account, which allows the individual to manage his income in India. However, the significant difference between an NRE and NRO account is that in the case of an NRO account, a 30% tax, surcharge, and education cess are imposed on the interest the individual earns on the NRO account.
Additionally, there is a limit of a maximum of one million dollars that the individual can transfer in a financial year from the NRO account to his respective foreign Bank Account.
Transfer of funds from the NRO account
The individual cannot transfer funds to an NRE account from a savings account in India. But the individual can transfer funds from NRO to the NRE account. Also, the individual can transfer funds from one NRE account to another.
The Reserve Bank Of India(RBI) permitted to transfer funds from the NRO account to NRE account in the year 2012. But there were certain conditions attached, i.e., one can transfer UDS 1 million in a financial year and note more than that. Also, there are conditions related to taxes on transfers as well.
Tax payment on fund transfer
The interest on the NRO account is subject to taxation, while the interest on the NRE account is entirely tax-free.
Also, due to the specified conditions, the individual must pay taxes on the amount of funds transferred.
A cheque/letter duly signed to transfer funds from NRO to the NRE account.
FEMA Declaration form that states your eligibility to transfer funds from NRO to NRE account by abiding by the provisions of FEMA law.
The proof of documents for the source of funds of the individual.
Additionally, the individual has to submit forms 15CA and 15CB.
Form 15CB can be obtained from a Chartered Accountant to show the source of funds, while Form 15CB can be filed online by visiting the portal.
Form 15CA filing
You need to follow the following steps to file form 15CA :
Go to the Income Tax website and log in there
Fill in your user ID(PAN number) and password
Once logged in, go to the section "E-file prepare and submit the online form(Other than ITR)."
Select Form 15CA there
There you will find instructions on how to fill out the form.
The form is divided into parts: Parts A, B, C, and D.
Then proceed towards completing the file that is suitable for you.
After filling up, verify and submit the form.
Then click on the form and take a printout of the form along with the acknowledgment slip.
Now sign the form you have filled out and submit a duplicate copy to the bank.
After doing all these, you should contact a CA and get help from them to understand the further process and the conditions applied to fund transfer.
A Chartered Accountant must state in form 15CB that the individual has cleared all the tax liabilities on the funds he has to transfer. The form also displays the nature of the fund.
If the interest one has earned on one's deposit in the NRO account is included in the fund, then the bank has the right to deduct 30% TDS or tax deducted at source. However, if the individual resides in the US, UK, or any other country with Double Taxation Avoidance Agreement with India, then the rate of TDS will reduce to 20%.
Reasons for funds transfer from NRO to NRE account
There are several circumstances under which one can transfer money into an NRE account. It's possible that one needs to convert one's earnings earned in India into the chosen currency outside the country so that the individual can pay for investments and costs there. In this case, one should consider keeping an NRO account just to collect income from India and manage all investments through an NRE account instead. This would provide the freedom to fully transfer the funds in case of any requirement.
Transferring the money from an NRO account to an NRE account can be one of the best options if you need to access the funds in any other currency. Numerous other benefits in the case of an NRE account, such as tax benefits, preferential rates on remittance, etc., make the transfer of funds from an NRO account to an NRE account a better option to consider.