Can I Transfer Money From NRE to NRO Account?

Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) manage their financial affairs in India through specialized bank accounts. Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts serve distinct purposes for individuals living outside India. A common inquiry involves transferring funds between these account types, particularly from an NRE to an NRO account. Understanding such transfers is important for financial planning and compliance with Indian regulations.

Understanding NRE and NRO Accounts

Non-Resident External (NRE) accounts are designed for NRIs to deposit foreign earnings in India. The funds in an NRE account are maintained in Indian Rupees, but they originate from income earned abroad. A significant benefit of NRE accounts is that both the principal and interest earned are fully and freely repatriable. Interest income from NRE accounts is exempt from tax in India.

In contrast, Non-Resident Ordinary (NRO) accounts are primarily used by NRIs to manage income generated within India. This includes earnings like rental income, dividends, pensions, or interest from Indian sources. NRO accounts can receive deposits in Indian and foreign currencies. Unlike NRE accounts, interest earned on NRO accounts is subject to tax in India. Funds in NRO accounts are generally not freely repatriable, though specific provisions allow remitting certain amounts abroad.

A key distinction between these accounts lies in their repatriability and tax treatment. NRE accounts allow for unrestricted repatriation of both principal and interest. NRO accounts have limitations on principal repatriation, typically capped at USD 1 million per financial year after applicable taxes. NRE accounts can only be held jointly with another NRI, whereas NRO accounts permit joint holdings with either an NRI or a resident Indian.

Eligibility and Permissibility of Transfer

A transfer of funds from an NRE account to an NRO account is generally permitted. Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) guidelines allow NRIs and Persons of Indian Origin (PIOs) to make such transfers. This flexibility enables NRIs to consolidate their funds or manage Indian income more effectively. The rationale often involves centralizing Indian earnings or preparing funds for expenses in India that do not require full repatriability.

Moving funds from an NRE account to an NRO account changes their status to being subject to Indian tax laws and repatriation limits applicable to NRO accounts. This permissibility allows NRIs to adapt their financial arrangements as their needs or residency status change. It is an internal transfer within an individual’s own accounts, shifting the nature of the funds from freely repatriable and tax-exempt to partially repatriable and taxable in India.

The Transfer Process

Initiating a transfer from an NRE to an NRO account involves several steps. These include gathering account details like NRE and NRO account numbers, bank branch details, and the Indian Financial System Code (IFSC) for both accounts. The exact amount to be transferred must also be specified.

Banks generally require a written request form or a specific bank form to authorize the transfer. Depending on the bank and amount, a declaration stating the source of funds or updated Know Your Customer (KYC) documents may be necessary. Some banks may also ask for a signed cheque or a formal letter of instruction from the account holder.

Transfers can be initiated through various channels, depending on the bank’s services. Many banks offer online banking portals, while others may require a visit to a bank branch in India or submission of a signed request via mail or courier from abroad. For larger transfers, banks may require additional documentation, such as a Foreign Exchange Management Act (FEMA) declaration. The bank then verifies submitted documents and processes the fund transfer, crediting the NRO account.

Tax Implications and Repatriation Considerations

Transferring funds from an NRE account to an NRO account does not incur direct taxes on the transfer itself. However, tax implications change significantly once funds are moved into the NRO account. Any interest earned on these funds in the NRO account becomes taxable in India, unlike the tax-exempt status they held in the NRE account.

Indian banks deduct Tax Deducted at Source (TDS) on interest earned on NRO accounts, typically at 30%, plus applicable surcharge and education cess. NRIs may claim benefits under Double Taxation Avoidance Agreements (DTAA) between India and their country of residence, potentially reducing the effective tax rate or allowing a tax credit in their resident country. To avail DTAA benefits, individuals need to provide their Permanent Account Number (PAN), a Tax Residency Certificate (TRC) from their country of residence, and a self-declaration in Form 10F to their bank.

A critical aspect to consider after the transfer is the change in the funds’ repatriability. While NRE funds are fully repatriable, funds in an NRO account are subject to repatriation restrictions. Under the Liberalized Remittance Scheme (LRS), NRIs can repatriate up to USD 1 million per financial year from their NRO accounts.

This limit applies to the principal amount and includes proceeds from asset sales or other accumulated funds. Current income like interest, dividends, or rent from the NRO account can be repatriated separately after taxes. Repatriation from an NRO account also requires adherence to specific documentation, including forms 15CA and 15CB, which certify tax compliance.