As a Non-Resident Indian (NRI), you cannot operate a regular savings account in India. Instead, you can open a Non-Resident External (NRE) or a Non-Resident Ordinary (NRO) account to manage your finances. The two types of accounts differ from each other on various counts
Globalisation has become the prevailing norm in the contemporary world, with individuals across the globe migrating to other countries in search of better education and livelihood.
Indians, in particular, are recognised for their propensity to work and reside in multiple nations. As of 2021, it was estimated that more than 1.3 crore Non-Resident Indians (NRIs) and People of Indian Origin (PIOs) were living abroad.
As per the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) guidelines, these NRIs are not allowed to operate a regular savings bank account in India. Instead, they need to have specialised bank accounts, known as Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts to conduct financial transactions in India.
Both these accounts have different functions, characteristics, and features. This article explores the difference between NRE and NRO accounts to help NRIs determine which one is more suitable to their requirements. Keep reading.
What is a Non-Resident External Rupee Account?
A Non-Resident External (NRE) account allows an NRI to deposit their earnings in a foreign currency and convert them into Indian National Rupees (INR). The primary objective of this account is to enable individuals living abroad to repatriate and invest their foreign earnings in India seamlessly.
These accounts are denominated in Indian rupees and are considered external accounts, which means the funds held in them are freely repatriable.
Key Features of NRE Accounts
Below are the key features of NRE accounts:
Currency Denomination
The deposits made into an NRE account get converted into Indian National Rupees as per the prevailing currency exchange rate. As an NRE account holder, you can withdraw funds in INR.
Repatriability
One of the standout features of NRE accounts is that they offer complete repatriability of funds. It means that you can transfer both the principal and the interest amount stored in an NRE account to a foreign account without any complications or restrictions.
Taxation
Interests earned on NRE accounts are tax-free* in India. It is a significant advantage for NRIs, as it allows them to earn returns on their deposits without being subjected to Indian income tax laws.
Joint Account Holding
NRIs can open their NRE accounts jointly with other NRIs or PIOs. It allows them to include their family members or business partners to manage finances collectively.
Permissible Credits
NRIs can deposit funds into their NRI accounts in any foreign currency, such as US dollars, Euro, or British Pounds. It can receive deposits from various sources, including salary, business profits, remittances from abroad, and transfers from other NRI accounts.
What is a Non-Resident Ordinary (NRO) Rupee Account?
A Non-Resident Ordinary (NRO) account allows an NRI to manage their income in India. They can deposit their earnings in India from various sources, including salary, business profits, pension, rent, interests, and investment returns.
However, NRO accounts do not offer the flexibility of complete repatriation of funds. Additionally, the interests earned on the deposits are subject to specific taxation rules.
Key Features of NRO Accounts
The key features of an NRO account include:
Currency Denomination
Since an NRO account is used for managing income earned in India, the deposits must be in Indian National Rupees. There is no need for currency conversion. You can withdraw funds in INR.
Repatriability
The principal amount in an NRO account is repatriable, subject to certain conditions. The interest amount, however, is subject to taxation and has restrictions on repatriation. You can repatriate a maximum of 1 million USD in a financial year.
Taxation
Since NRO accounts come under the category of ordinary accounts, the interests earned on them are subject to Indian taxation laws. For example, a 30% TDS on NRO accounts is deducted at the time of interest payment. However, you can claim the benefits of Double Taxation Avoidance Agreements (DTAA) to reduce your payable tax.
Joint Account Holding
NRIs can open their NRO accounts jointly with other NRIs, PIOs, or resident Indians. This feature allows them to include their acquaintances or family members in India as joint account holders.
Difference Between NRE and NRO Accounts
Although both NRE and NRO accounts help NRIs manage their finances, they are starkly different from each other. The table below sums up the differences between NRE and NRO accounts based on various parameters:
Parameter |
NRE Account |
NRO Account |
Acronym |
NRE stands for Non-Resident External account |
NRO stands for Non-Resident Ordinary account |
Purpose |
NRE accounts help NRIs to transfer or invest their income in a foreign currency in India |
NRE accounts help NRIs manage their income in India in Indian National Rupees |
Taxability |
Interests earned on NRE accounts are tax-free in India |
Interests earned on NRO accounts are subjected to Indian taxation laws |
Repatriability |
Funds stored in NRE accounts, including both principal and interest, are fully repatriable without any restrictions or complications |
The principal amount can be repatriated but only up to 1 million USD in a financial year. The interest amount can be repatriated only after the payment of taxes |
Holding Pattern |
NRE accounts can be held jointly by two NRIs but not by an Indian resident |
NRO accounts can be held jointly by two NRIs or one NRI and one Indian resident |
Deposits and Withdrawals |
The deposits can be made in any foreign currency but the withdrawals are allowed in INR |
Both deposits and withdrawals have to be in INR |
Exchange Rate Risks |
Since deposits are converted to INR, they are exposed to risks associated with currency exchange rate fluctuations and conversion losses/gains |
Since both deposits and withdrawals are in INR, the funds in NRO accounts are not exposed to currency exchange rate fluctuations |
Funds Transfer |
Funds in NRE accounts can be transferred to other NRE accounts, NRO accounts, or foreign bank accounts |
Funds in NRO accounts can only be transferred to other NRO accounts or resident accounts but not to NRE accounts |
How to Open NRE and NRO Accounts?
Based on your precise requirements, you can open an NRE or NRO account through any of the following methods:
Method 1 – Convert your existing resident account to NRE/NRO account
You can ask your bank to convert your existing resident savings account to an NRE or NRO account. The conversion may take a few working days post the submission of the required documents.
Method 2 – Open a new NRE/NRO account
You can also approach a bank to open a new NRE or NRO account as per your requirements. Just make sure you fulfil the NRI account eligibility criteria before applying.
The Final Word
As an NRI, you must understand the differences and benefits of NRE and NRO accounts. The choice between the two depends on your purpose and income sources. Additionally, you can consider factors such as tax implications, repatriation requirements, and account holding patterns. You can consult a financial expert or banking professional to understand the applicable TDS on NRO accounts and other such norms.
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