NRE vs NRO account – which is good for NRIs?

NRIs often need to maintain bank accounts in India for various reasons. Some require bank accounts to receive their income generated in India, and some want to invest their money earned abroad, in India. Also, once a person becomes an NRI, it becomes illegal for him to hold Resident bank accounts. Any existing bank accounts should be converted to non-resident Rupee accounts. Either way, NRIs have a strong need to hold Rupee accounts in India. This need is addressed by NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts. So, let’s now compare NRE vs NRO accounts.

But why do NRIs need two different categories of accounts?

It is important for you to understand that the NRE and NRO accounts are different as chalk and cheese, and serve a different purpose altogether.

These two categories are designed so that you can segregate and hold your earnings abroad, and earnings in India, with easier compliance tax laws and FEMA(Foreign Exchange Management Act) regulations.

You should choose the right one, according to your financial needs.

Let us understand what the NRE and NRO accounts signify for NRIs.

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What are NRE and NRO accounts?

NRE and NRO accounts are Indian Rupee accounts meant exclusively for NRIs. Most Indian public sector and private banks have the facility to open these accounts.

Both these accounts can be opened as Savings, Current or as Deposit accounts.

You are allowed to open an NRE account after you qualify as an NRI for tax purpose. However, existing Resident accounts itself can be converted into NRO account once you become an NRI. It is your duty to intimate the change in your tax status to the bank.

Also read: NRI Investment options in India

Are there any similarities between NRE and NRO accounts?

Yes, there are very few similarities between them.

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Both are Indian Rupee accounts meant for NRIs only, and both provide the option to open either Savings, Current or Deposit account. Withdrawals from both these accounts will be in Indian Rupees only.

How different are NRE and NRO accounts?

Let us understand the differences between NRE and NRO accounts in various parameters.

Deposit of Funds: You can deposit funds earned abroad in both NRE and NRO accounts.However, all your income generating in India should be deposited in NRO accounts only. You are also not allowed to deposit money into anyone else’s NRE account.

Repatriation: Repatriation means sending from, and bringing back money to an NRI’s country of residence. You can repatriate any amount from your NRE account to any account outside India in any currency of your choice.

However, for an NRO account, Reserve Bank of India (RBI) has made some restrictions on repatriation. You can take out USD 1 million only to your resident country in a financial year (Apr-Mar).

Also, you might need to take the help of a Chartered Accountant to complete the paperwork.

Taxability: Taxation is one area where NRE account scores over NRO account. NRE accounts are tax exempted. Interest earned on the funds in the accounts are also exempt from Income Tax. Also, no matter how much funds you hold in your account, it is exempt from gift tax and wealth tax as well.

This is a major draw for NRIs to park funds in India. However, you might have to declare this income in the country of your residence and pay taxes if applicable.

NRO accounts are taxable, and the tax laws applicable are similar to that of Resident accounts.

Since, these accounts are meant for income generated in India, income tax, wealth tax, and gift taxes are applicable. Depending on the tax bracket your Indian income falls into, the tax rate could be as high as 30.2%.

However, you might have to declare this income in the country of your residence. If India has a DTAA (Dual Taxation Avoidance Agreement) with your country of residence, you can claim relief from double taxation.

Fund Transfer between accounts: You can transfer funds from an NRE account to another NRE account or an NRO account or a Resident savings account.

 You can transfer funds from NRO account to another NRO account and Resident savings account, but not to an NRE account.

Account Holding: You can open a joint NRE account with another NRI but not a Resident Indian.

You are permitted to open a joint NRO account with another NRI or a Resident Indian.

Currency Option for Deposit: You can deposit in cash to an NRE account in any foreign currency but deposit in Indian Rupees is not allowed.

 You can deposit foreign currency or Indian Rupees into your NRO account. However, deposits above USD 5000 should be supported by currency declaration.

Motive: The motive of NRE account is to transfer funds earned abroad to India, on repatriable basis. It can be held or routed to other investments in India.

NRO account is meant to hold income generated in India such as rental income, interest income, pension income etc. There are restrictions from RBI on repatriation from this account.

Exchange Rate Fluctuation:

NRE accounts are exposed to two kinds of exchange loss

• Conversion loss
• Daily fluctuation in the value of Indian Rupee

NRO accounts are always secure from currency fluctuations.

Should you open an NRE or NRO account?

Well, you should choose the right account based on your financial needs. Both these accounts serve a different purpose. Here are some tips for you to choose the right account:

Opt for NRE account if:

• You want to remit your overseas earnings and hold it in Indian Rupees.
• You plan to make repatriable investments in Indian markets.
• You want to open a joint account with another NRI.
• You want an account which allows free repatriation to any currency.
• You foresee repatriation of more than 1 million USD.

Opt for NRO account if:

• You need an account to receive your income in India.
• You want to hold your Indian earnings in Indian Rupees and have no plan to use the same in your country of residence.
• You want to open a joint account with a Resident Indian. This feature is very useful if you want your Indian earnings to be easily accessible to your family back home.

Can I hold both NRE and NRO account?

Yes, an individual can open both NRE and NRO accounts to meet his needs. If you have any income arising in India, you can receive it in NRO account, and if you want to park your earnings abroad in India, you can open an NRE account.

However, the restrictions for fund transfer between NRE and NRO accounts are applicable, even though it belongs to the same individual.

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Final Words

Finally, both NRE and NRO accounts have different features to fulfil various needs of NRIs.

They offer great convenience to park your money earned abroad, to get benefit from tax sops and to easy repatriation. However, you should make the right choice depending on your financial needs.