What happens to the NRE Account of an NRI once he or she returns to India?

COVID-19 impacted NRIs worldwide and it has severely affected the jobs and business of NRIs. In this situation, it is very important for every NRI to check whether their NRE Accounts in India can still maintain and operate once they return to India. Here we discuss why this is important:

In India, interest income of an NRI from a Saving Bank Account or Non-Resident Ordinary (NRO) Account, Fixed or Term Deposit etc. is taxable and the Banks deduct the TDS from the such interest income. However, the interest income from a Non-Resident (External) (‘NRE’) Account is not taxable in India provided the Account Holder maintains his NRI status under the Foreign Exchange Management Act, 1999 (FEMA).

It is a legal requirement under FEMA that every NRE Account should be re-designated as Resident Rupee Accounts (Savings or Fixed Deposit Accounts) immediately upon the return of the account holder to India or for taking up employment or for carrying on business or for any other purpose indicating his intention to stay in India for an uncertain period. Here it is important to know that unlike in the Income Tax Law, for the purpose of FEMA, intention of stay (in India or abroad) is more relevant than the duration of stay of the person.

In the current COVID juncture, there could be a possibility that NRI may return to India after losing their jobs or business abroad. In such case, where NRI’s intention to stay in India is for uncertain period, then NRI may lose their residential status under FEMA and effectively the interest income from NRE Account would become taxable in India and the Banks will deduct TDS from such interest income. There is no requirement to close the NRE FDs or re-designate the NRE FDs to Resident FDs since pre-closure before maturity may cause penalties.In such case it is better to have a proper communication with the Banker.

In case, NRI has an option or plan to go back to abroad after a point of time, returned NRI can plan to convert the existing NRE Account to Resident Foreign Currency (‘RFC’) Account to avoid income tax exposure.