Imagine you are a Non-Resident Indian (NRI) and wish to manage your income, both from India and abroad as well. However, the task of managing your income without the right kind of bank accounts could be trickier and more complicated. That's where the quite popular twin banks play a vital role. The Non-Resident External (NRE) account and the Non-Resident Ordinary (NRO) account are like siblings. Both are governed by India’s Central Bank, the Reserve Bank of India (RBI) and partly by the Foreign Exchange Management Act (FEMA).
As per the FEMA guidelines, if you are an NRI, you cannot hold a savings account in your name in India. Either you must convert all your money (earned abroad) to an NRE or NRO account. If anyone continues to use his/her savings account in India, then he/she must pay hefty penalties.
Though the two banks might sound similar, they serve a different purpose. Your tax liability, repatriation of funds and your overall financial planning could be drastically impacted by the kind of account you choose.
Let’s dive into the clear and comprehensive comparison between the NRE and the NRO accounts so that you could take an informed decision.
NRE account
NRE account allows the NRIs to park their foreign income/earnings in India. The foreign funds are deposited to the NRE Account in foreign currency, however, at the time of deposit, the funds are converted to Indian Rupees (INR). That is, the fund balances are maintained only in Indian Rupees (strictly Indian denominations only), even if deposited in any other foreign currency. In an NRE account, you can deposit only in foreign currency such as USD, GBP, AED, EUR, but withdraw only in Indian currency INR. The amount you deposit into an NRE account must be earned outside India.
It must be noted that the predominant benefit in the NRE account is that all the deposited funds could again be sent back to the foreign country (fully repatriable) and there are no stipulated limits on that. In short, money from the NRE accounts, both the principal amount deposited, and the interest earned are freely and fully repatriable/transferable back to the foreign country.
NRE accounts are of several types – NRE savings account, NRE current account or NRE fixed deposits and NRE recurring deposits. Another appealing factor about the NRE account is that the interest earned for the amount deposited in the NRE account is tax-free in India. That is, both the deposited principal amount and the interest earned thereon are tax-exempted. It is because of this reason, many NRIs, while working abroad, open an NRE account if they want to save money in India. An NRE account can be held jointly but only with another NRI and not a resident Indian citizen. One of the major drawbacks of the NRE account is that since the deposits, in foreign currency, are converted immediately to INR at the time of deposit, account holders might face currency fluctuation risk.
NRO account
NRO account is used by the NRIs to manage income earned/generated in India, such as rent, dividends, or pension. In an NRO account, you can deposit both in INR and in a foreign currency, but the foreign currency would be converted to INR, based on the prevailing exchange rates. That is, income generated in a foreign country and income generated locally in India can be deposited in an NRO account. It may be noted that you can withdraw funds only in Indian currency. The funds deposited in the NRO account are only partially repatriable. The funds could be repatriable up to $1 million per financial year, subject to certain terms and conditions and only after paying taxes.
The interest earned for deposits in an NRO account is taxable in India. That is, the interest earned in the NRO accounts is subject to Tax Deductible at Source (TDS.) Like the NRE account, even in the NRO account, the balances are held only in INR.
Even the NRO accounts are of several types – NRO savings account, NRO current account or NRO fixed deposits and NRO recurring deposits. An NRO account can be held jointly with another NRI or a resident Indian citizen.
For domestic deposits, there is no currency conversion and hence, there is no risk of forex fluctuation for Indian income. The NRO account is a must-have for NRIs who still get income in India or need to pay bills locally.
Transfer of funds
You can transfer funds freely from an NRE account to an NRO account. However, once the amount is transferred to the NRO account, it is treated only as NRO funds and all rules and regulations pertaining to the NRO account are applicable to the transferred funds. The transfer is, in almost all cases, a one-way transfer and you cannot move the funds back to the NRE account from the NRO account.
You cannot freely or directly transfer funds from an NRO account to an NRE account. However, this could be done in a specified process. Funds could be moved from an NRO account to an NRE account only if they are legitimately acquired in India (for instance, rent, dividend, pension, Indian salary, etc.) and you should have paid all the applicable Indian taxes on those funds. Further, a few self-declaration- and tax-compliance forms must be submitted for the approval of the transfer of funds. Above all, the total repatriation is allowed within $1 million per financial year.
Here is a comparison between NRE and NRO accounts:
| Parameters | NRE | NRO |
|---|---|---|
| Definition | NRE account allows the NRIs to park their foreign income/earnings in India. | NRO account is used by the NRIs to manage income earned/generated in India, such as rent, dividends, or pension. |
| Taxation | In the NRE account, both the principal amount deposited and the interest earned thereof are tax-free in India. | The interest earned for deposits in an NRO account is taxable in India. That is, the interest earned in the NRO accounts is subject to Tax Deductible at Source (TDS.) |
| Repatriability | Money from the NRE accounts, both the principal amount deposited, and the interest earned are freely and fully repatriable/transferable back to the foreign country. | The total repatriation limit allowed in an NRO account is U.S.$1 million per financial year. |
| Fund transfer | You can transfer funds freely from an NRE account to an NRO account. | You cannot freely or directly transfer funds from an NRO account to an NRE account. However, this could be done in a specified process. |
| Joint account holding | An NRE account can be held jointly but only with another NRI and not a resident Indian citizen. | An NRO account can be held jointly with another NRI or a resident Indian citizen. |
| Forex fluctuation risk | One of the major drawbacks of the NRE account is that since the deposits, in foreign currency, are converted immediately to INR at the time of deposit, account holders might face currency fluctuation risk. | For domestic deposits, there is no currency conversion and hence, there is no risk of forex fluctuation for Indian income. |
| Deposits/withdrawals | In an NRE account, you can deposit only in foreign currency such as USD, GBP, AED, EUR, but withdraw only in Indian currency INR. | In an NRO account, you can deposit both in INR and in a foreign currency, but the foreign currency would be converted to INR, based on the prevailing exchange. rates. You can withdraw funds only in Indian currency. |
| Types | NRE accounts are of several types – NRE savings account, NRE current account or NRE fixed deposits and NRE recurring deposits. | NRO accounts are of several types – NRO savings account, NRO current account or NRO fixed deposits and NRO recurring deposits. |
| Currency of balances | In the NRE account, the fund balances are maintained only in Indian Rupees (strictly Indian denominations only) (after forex conversion to INR) | In an NRO account also, the balances are held only in INR. |
Cheers! Catch you later with another interesting and informative episode. Until then...