With interest rates in India being significantly higher than those in developed countries like the US, UK, and Canada, many Indians living abroad prefer to park their excess funds in India to earn a handsome return on their surplus money. To encourage Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) staying abroad to invest in India, the government has allowed these individuals to open three types of NRI accounts in India:
1. FCNR Account
2. NRO Account
3. NRE Account
1. FCNR Type NRI Account
FCNR stands for Foreign Currency Non-Resident Account and can only be opened in foreign currency, not in Indian currency. It is a form of fixed deposit on which regular interest is paid. Since interest rates in India (approximately 7-8%) are much higher compared to those in western countries (approximately 1-2%), many NRIs invest their surplus funds in fixed deposits in India through this type of NRI account.
Another benefit of this type of NRI bank account is that the investor will not have to bear any risk of fluctuations in the foreign currency. For example, if Mr. A invests $10 in this form of NRI account and the interest rate is 10% per annum, he would get $11 at the end of the year irrespective of the Rupee-Dollar exchange rates. Therefore, in this form of NRI bank account, he is free from any foreign exchange risk.
This type of NRI bank account can be opened for a minimum of 1 year and a maximum of 5 years. For more details on this form of NRI account, its features, procedures for opening the FCNR account, and permitted foreign currencies, kindly refer to our detailed article on FCNR Account for NRI. The following video also explains the mistakes NRIs make while choosing which type of bank account will suit their needs.
2. NRE Type NRI Account
NRE Account, i.e., Non-Resident External Account, is a rupee-denominated account, and the amount in this type of account is freely repatriable. This type of NRI account can be in the form of savings, current, recurring, or fixed deposit.
As this form of NRI account is rupee-denominated, the investor will have to convert foreign currency into rupees, and in case he intends to take the funds back to his home country, he will again have to convert the rupees into foreign currency.
This form of NRI bank account is best suited for overseas savings which have been remitted to India by converting the foreign currency into INR. For more details on this form of NRI account, eligibility, and documents required, kindly refer to our detailed article on NRE Account for NRIs.
3. NRO Type NRI Account
NRO Account, i.e., Non-Resident Ordinary Account, is a rupee-denominated account and can be in the form of savings, current, recurring, or fixed deposit. The income which is deemed to accrue or arise in India can be deposited only in this type of account. Examples of such forms of incomes are rent, dividends, and commissions, etc. Such incomes cannot be deposited in an NRE account.
Moreover, the interest earned on this form of account is also taxable compared to NRE and FCNR accounts, where tax on interest is not levied in India. TDS on interest is also deducted in this form of NRI bank account.
Apart from these three types of NRI accounts, NRIs can also invest in shares and real estate in India.
