NRE and NRO Accounts and Bringing Money Over

When you move abroad for work, the accounts you leave at home do not stay the same in the eyes of either country. Your home country may require them to be converted into non-resident accounts, with their own rules on what can go in, what can come out, and what is taxed there. The United States, meanwhile, sees all of them as foreign accounts whose income is taxable and whose balances may need reporting. This chapter uses India's NRE, NRO and FCNR accounts as the worked case, because they are the most common among readers of this shelf, and points out the parts that apply to non-resident accounts from any country.

Why your accounts change when you move

Most countries with capital controls treat a citizen who lives abroad differently from one who lives at home. In India, the Reserve Bank of India's guidance is direct: when a resident Indian becomes a person resident outside India, existing resident accounts should be designated as NRO accounts. An NRI, in the RBI's definition, is a person resident outside India who is a citizen of India; a Person of Indian Origin is a foreign citizen of Indian origin, also resident outside India. Moving for a job abroad generally makes you one or the other under India's foreign exchange law, which is a different test from India's income tax residency and from the US tests in chapter 1.

Other countries run similar schemes under different names. The questions are always the same: which account can receive money from abroad, which can send money out, and how each is taxed at home.

Three account types, in general terms

The RBI's FAQ on accounts held by non-residents describes three main types.

NRE (Non-Resident External) account. A rupee account funded with money brought in from outside India. Balances and interest are repatriable, meaning they can be sent back abroad freely, and the RBI notes that income earned in these accounts is exempt from Indian income tax.

FCNR (B) account. A term deposit held in a foreign currency, such as dollars, rather than rupees. It is also repatriable and its interest is also exempt in India. Because it is in dollars, it carries no currency risk for someone whose life is now in dollars.

NRO (Non-Resident Ordinary) account. A rupee account for money that arises in India: rent, dividends, pension, the proceeds of selling property, and balances from your old resident account. Interest is taxable in India. Current income is repatriable, but other balances can be sent abroad only within a limit, which the RBI states as $1,000,000 per financial year (April to March), together with other eligible assets, subject to the bank's checks and Indian tax documentation.

These accounts can be held jointly in some combinations, including with a resident relative under conditions the RBI sets. When you return to India for good, NRE balances can be redesignated as resident accounts or moved to a resident foreign currency account, and NRO accounts become resident accounts again. The rules change from time to time; the RBI FAQ and master directions are the source to check.

Tax-free at home is not tax-free here

This is the costliest misunderstanding in the chapter. NRE and FCNR interest is exempt in India, which means no Indian tax is withheld. But once you are a US resident, that interest is part of your worldwide income and fully taxable on your US return, at your own bracket. Because no foreign tax was paid, there is no foreign tax credit to offset it.

A deposit worth $30,000 earning 7.0% a year grows to $42,077 over 5 years, $12,077 of interest. In India, if the deposit is in an NRE account, none of that is taxed. In the US, every year's interest is ordinary income; for a single filer with $110,000 of income it is taxed at 22.0%. State tax can add more. The same deposit in an NRO account is taxed in India first, and that Indian tax can then be credited against the US tax on the same interest, within the limits in chapter 3.

For a deposit that compounds and pays out only at maturity, the US may still expect interest to be reported each year rather than at the end. That depends on the deposit's terms; confirm it with a preparer rather than waiting for maturity.

Currency is the other hidden factor. A rupee deposit's return is in rupees, but your US tax and your spending are in dollars. If the rupee falls against the dollar by a few percent in a year, a deposit paying 7% in rupees earns noticeably less than 7% in dollars, while US tax is still owed on the interest converted at the rate when you received it. FCNR deposits avoid that by staying in dollars.

Reporting: every one of these is a foreign account

For a US resident, NRE, NRO and FCNR accounts are all foreign financial accounts. They count toward the FBAR threshold of $10,000 at any time in the year and toward the Form 8938 thresholds in chapter 2, including the peak balance of a deposit that was later moved. An account held jointly with a parent counts at its full value for each owner who is a US person. Banks at home may also report your accounts to the United States under information-exchange agreements, so an unreported account is more visible than many people assume.

Bringing money to the United States

Moving your own savings from home to a US account is not income. A transfer of principal you already owned is not taxed when it arrives, and a large transfer from your own account is not a gift. What is taxed is what the money earned along the way: interest, dividends and gains, each in the year it arose.

A few practical points help the move go smoothly.

• Keep the paper trail. Statements showing the source of the money, especially for sales of property or shares, make questions from either country's bank easy to answer.
• Know which account to send from. Repatriable NRE and FCNR balances move freely; NRO balances beyond current income go through the bank's process, Indian tax paperwork and the yearly limit.
• Compare the conversion. The exchange rate you are given matters as much as the fee. Chapter 7 shows how to compare providers.
• Report the right year. If you sell an asset to fund the transfer, the gain belongs to the year of the sale, on both returns.