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By Vipul Jain
An NRI (Non-Resident Indian) cannot open a regular savings bank account in their name in India. They can only open an NRE or an NRO bank account. NRE stands for Non-Residential External Account, and NRO stands for Non-Resident Ordinary Account. In this blog, we will discuss the differences between an NRO and an NRE Account.
Before moving forward with the difference between an NRO vs NRE account. It is extremely important to understand your NRI status. Let's look at the definition of an NRI under the Fema Act and the Income Tax Act (ITA).
According to the Fema Act, an NRI is an individual who is a resident outside India but is an Indian citizen.
An individual who has been in India for at least 120 days or less. Or, he/she is in India for 60 days or less even after completing 365 days in the preceding four years.
So, according to the ITA, an NRI includes a person who has visited India for less than 120 days in a fiscal year.
This rule was brought in the fiscal year (FY20-21). Previously, the 120-day threshold was 182 days. However, there is a thing to be noticed here.
If the total income earned in India during the fiscal year is more than Rs 15 lakh then only the 120-day rule will apply. NRI visitors whose taxable income in India is up to Rs 15 lakh during the fiscal year will continue to remain NRIs only. If their duration of stay does not exceed 181 days as this was the case earlier.
An NRE account stands for Non-Resident External. It is designed for NRIs to hold their foreign earnings in Indian rupees, which they have earned while residing outside India. The account allows only foreign earnings from outside India.
It is well-suited for those who want to send the money to India which they have earned overseas. An NRE account can be in the form of a savings bank account, recurring deposit, or fixed deposit. Your money gets converted to Indian rupees when you deposit it. The interest that you earn from an NRE account along with the principal amount are exempt from tax in India.
An NRE account is mainly used by NRIs to complete their household expenses in India. The exemption from paying tax makes this a great investment option for NRIs. You can repatriate any amount of interest and principal amount without any restrictions.
An NRO account or a non-resident ordinary account is an Indian bank account. It enables NRIs (Non-Resident Indians), PIOs (Persons of Indian Origin), and OCIs (Overseas Citizens of India) to manage their income generated within India. It allows both foreign currency from outside India and also rupee credits from within India.
The money kept in the NRO account has to be in Indian rupee. The money in the NRO account cannot be repatriated easily to a foreign currency. Interest earned with this account is taxed at 30%. It excludes the surcharges and any other taxes as applicable under the Income Tax Act. In the NRO Account "Income" in India also includes pension, rent, dividend, etc.
An NRI often needs to work on handling their foreign investments in India. Determining the right account to store your money can be quite confusing. There are a variety of accounts available in the market. In which NRE and NRO accounts are the two main tools on which an NRI can rely. Before you choose any one between an NRE vs NRO account you need to know the differences between these two. These are the several differences between an NRE vs NRO account.
|
Features |
NRE Account |
NRO Account |
|---|---|---|
|
Full Form |
Non-Resident External Account |
Non-Resident Ordinary Account |
|
Definition |
An NRE account is designed for NRIs to keep their foreign earnings in Indian rupees while residing outside of India. |
An NRO account is an Indian bank account that allows NRIs, PIOs, and OCIs to keep their income generated within India. |
|
Purpose |
NRE account can be used to transfer foreign earnings to India in Indian rupees. |
NRO accounts can be used as a savings account. It is to manage the income earned in India by an NRI in Indian rupees. For example, pension, rent, dividend income, etc. |
|
Types of Accounts |
All types of accounts like current, savings, fixed deposits, and recurring deposits are allowed under the NRE account. |
NRE Savings Account, Current, Recurring, or Team Deposit accounts can be opened under the NRO scheme. |
|
Taxation |
Deposits made in the NRE accounts are tax-free. It means the principal amount and the interest earned is exempt from tax. |
Any interest earned in the NRO account is subject to tax or TDS deductible at source.
|
|
Repatriability |
Both principal and interest can be repatriated. |
The entire interest amount can be repatriated. Although, the principal amount can be repatriated.only within the set limits. The repatriation limit is up to 1 million USA in a fiscal year after paying all the applicable taxes. |
|
Joint Account |
Can be opened only if all the account holders are Non-resident Indians |
Can be opened by an NRI along with an Indian citizen or another NRI. |
|
Deposits and withdrawals |
Only foreign currency deposits are allowed and only Indian currency withdrawals are allowed. |
Indian currency as well as foreign deposits are allowed. Withdraw in Indian currency, subject to applicable TDS. |
|
Inter Transfer |
Funds cannot be transferred from an NRO account to an NRE account. |
Funds can be transferred from an NRO account to an NRE account. |
|
Exchange Rate Risk |
NRE accounts are subject to conversion loss and fluctuation in the value of the rupee against a foreign currency |
There are no risks involved in an NRO account. |
|
Denomination |
Indian Rupee. (It means your foreign currency savings are converted both during dep[osit and withdrawal) |
Indian Rupee |
|
Minimum Balance |
Up to Rs 10,000 |
Up to Rs 10,000 |
Before choosing between an NRO vs NRE account. Learn about the importance of an NRO and an NRE account:
Both the NRE and NRO accounts can receive foreign currency credits in India. If your purpose behind opening an account is to ease the transfer of foreign income in India. Then both an NRI and PIO can be indifferent to open an NRE or an NRO account.
An NRI may be earning their income in several forms in Indian currency. It can be in the form of dividends, rental income, business income, etc. For any such income, an NRI should open an NRO account only. An NRO account doesn't allow any credits in Indian currency and the transaction may get rejected,
If the purpose of transferring funds to India is to use such funds in India itself, both NRE and NRO accounts eliminate the currency risk for an NRI. This is because the amount received in the accounts gets converted into the Indian rupee at the same time. So, the balance is carried forward in Indian currency only.
Repatriation of funds means the ability to send the money to a bank account abroad. Both NRE and NRO accounts allow the NRI to repatriate the interest income without any restrictions. In terms of principal amount, only the NRE account allows the repatriation of the funds with no limits. The balance left in the NRO account excluding the interest income is subject to a maximum limit.
The interest earned for the balance in the NRE accounts is exempt from tax. If there is no other taxable income in India for the NRI, then they are not even required to file their Income Tax Return (ITR) in India. They also don't have to pay any tax in India. On the other hand, an NRO account doesn't allow any such tax exemption. Also, the account holder might have to pay taxes as applicable for the interest income earned from an NRO account.
These are the main things to keep in mind and consider when choosing between an NRE vs NRO account. This is to make the right choice of bank account and to do any banking transactions in India.
You must consider the currency in which you want to deposit as well as withdraw your savings.
If you intend to transfer your funds to an NRE account, then choose an NRE account only. This is because NRE accounts allow you to transfer funds to both an NRE and NRO account. On the contrary, NRO accounts don't allow you to transfer funds to an NRE account.
An NRO account doesn't pose any risk in terms of exchange rate fluctuations. On the other hand, An NRE account is subject to conversion loss.
You must contact and consult an employee of the bank. You can also connect with any other financial expert before choosing between an NRE vs NRO account.
Being an NRI, choosing between NRI vs NRO is not a question but a necessity. You may have to choose between the two accounts according to your needs. Choosing between an NRI and vs NRO is not a choice but a matter of technicality. However, don't stress as it is a very simple choice.
If you have any income earned overseas then you should open an NRE account. On the other hand, if the income is earned in India then maintain and keep it in an NRO account.
Now, the question arises why not opt for an ordinary savings account? The answer to this confusion is that being an NRI you cannot have ordinary resident savings, fixed deposits, or recurring deposit accounts in banks in India. You must have either or both an NRO or an NRE account according to your needs.
You may have to find a good bank to open your account. All the Indian private bank and public sector banks provide the option of opening an NRO and NRE account to all the NRIs. The laws and rules of these banks are almost the same. The only difference will be in the quality of service and customer support. These two things will differ from bank to bank so make sure to stay updated through your research.
If you classify under the Fema Act as an NRI then you can open an NRE or NRO account. There is no need to be classified as an NRI under the Income Tax Act.
There are two ways to open an NRO or an NRE account.
1). You can convert your existing savings account to either an NRE or an NRO account.
2). You can open a new bank account from scratch. If you don't have a regular savings account in your name.
There are several banking options for NRIs. Being an NRI, you should decide according to your specific financial needs and income sources. Choose between an NRE vs NRO account by considering the differences. An NRE account is ideal for keeping foreign income converted into Indian rupees. Also, without a repatriation limit. On the contrary, NRO accounts permit you to manage both foreign and Indian income. However, they have a repatriation limit of 1 Million USD per fiscal year. In the end, the choice depends on your individual transaction and repatriation needs.
NRIs (Non-resident Indians) and PIOs (Persons of Indian origin) both can open an NRE or NRO account.
Yes, an NRI can have both an NRE and NRO account at the same time. Both accounts serve different purposes.
Opening an NRE or an NRO account is not necessary for an NRI. However, it is recommended to open these accounts to manage your finances functionally in India.
The interest earned in an NRE account is free from tax in India. While the interest earned in an NRO account is subject to income tax. So, the NRE account is free from tax in terms of interest income in India.
An NRI can open a few types of bank accounts in India. Such as an NRE account, an NRO account, and an FCNR account.
FCNR stands for Foreign Currency Non-Resident Account. It is a fixed deposit account that permits NRIs to save their money in foreign currencies in India and also offers several benefits.
