Difference Between NRE and NRO Account

The main difference between an NRE and NRO account is that an NRE account is used to deposit foreign income in India and offers tax-free and fully repatriable funds, whereas an NRO account is used to manage income earned in India and is subject to taxation and repatriation limits.

In this blog, we have explained the NRE vs NRO account meaning, their differences, taxation rules, account opening process, and ways to deposit money. Read till the end to also learn about the penalties you may face for not converting your accounts after becoming an NRI.

NRE vs NRO Account: Understand the Key Differences

Here is the table that represents the difference between NRE and NRO Accounts:

The main difference between the NRE and NRO accounts is the funds that are used to open an account, repatriability, and taxation.

You can open an NRE account by using the foreign currency and an NRO account with both the foreign and Indian funds. The NRE account is completely tax-free in India, while there are taxes applicable to the NRO accounts.

Also, an NRE account is totally repatriable tax-free, but under an NRO, you can repatriate the funds, but the taxes are applicable on the amunt your have repatriated. Because of this difference, an NRO account is better for those who want to keep their money in the country.

Also, for both NRE and NRO accounts, joint accounts can be held with an Indian resident or with another NRI.

What is an NRE Account for NRIs?

The NRE full form is Non-Resident External, and it can be opened and maintained by the NRIs by using foreign funds and held in Indian Rupees. You can easily deposit your foreign earnings into the NRE account from your country of residence.

The amount is deposited from foreign currency and is converted to the Indian currency at the prevailing exchange rate. If you have a savings or current account, then you can use it to pay bills or issue checks for payments in India while staying abroad.

You can also appoint a Power of Attorney (POA) holder who is an Indian resident and can withdraw payments from your account or even make some investments on your behalf. In an NRE deposit, you can save your foreign earnings in a fixed-term deposit of 1-3 years in Indian Rupees.

In all the cases, you can earn interest rates on the converted rupee amounts regardless of how much you have sent, and you don't have to pay taxes on both the principal and interest in India. The interest rates on these accounts will be decided according to the guidelines issued by the Department of Banking Regulations.

The best benefit of the NRE account is that any amount is fully repatriable to your resident country tax-free. You can say that NRE accounts give a tax-free space for remittance, ample liquidity, and an easy medium to pay expenses in India, and a way to invest in the country.

What is an NRO Account?

An NRO full form is Non-Resident Ordinary, which can be opened in the form of savings, current, recurring, or fixed deposits. You can deposit both Indian and foreign currency in these accounts, but the balance is held in Indian Rupees. You can hold this account jointly, including two NRIs or an NRI and an Indian Resident.

This account can also be used to make local Indian payments, such as paying bills, etc., or if you have any tenants in your Indian flat, then you can deposit earnings in this account. The NRO accounts can also take remittances from outside India, legitimate dues in India, and transfers from other NRO bank accounts.

Keep in mind that taxes are applicable in the NRO accounts. Due to the taxation on repatriations, this account is considered best for the NRIs to deposit their Indian earnings in this while also accepting foreign deposits.

The NRO account is best if you do not have any intention of sending your balances out of India because of its tax implications and restricted repatriation. It can be used to deposit your income obtained from Indian sources, such as rent or dividends. It is more convenient if you open this account jointly with an Indian resident.

For both the NRE and NRO accounts, there are fees applied by the bank to maintain the accounts. You can contact your respective banks to know about the applicable fees.

Why are NRO and NRE Accounts Used for?

1. Sending Foreign Income To India:- 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. 
2. Receiving Indian Income In The NRI Account:- 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.
3. Eliminating the Currency Risk:- 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. 
4. Repatriation of funds:- 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. Regarding the principal amount, only the NRE account allows repatriation of funds with no limits. 
5. Taxability:- 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.

Taxation on NRE and NRO Accounts

There are no taxes applicable to the income from interest on the balances from the NRE account. While the income from balances in an NRO account is subject to Indian income and wealth tax laws. 

You should consult a tax advisor before taking any actions, as this information is provided in a general capacity and you should not take it as tax advice. 

Can I Open an NRO/NRE Account?

Yes, you can start the process to open an NRO/NRE account online by visiting any of the major commercial bank websites. Eligible NRIs can also open a new bank account on their temporary visit to India using foreign currency notes or traveller's cheques, as long as the bank can deem that they do not have any intention to become a resident of India.

For both the NRE and NRO bank accounts, you can open them as a joint account. In case of a POA, the bank account should be opened in the name of the NRI and not the POA. A PAN Card or Form 60 is needed fr the account holders. In the case of joint accounts, all documents are needed for both individuals.

Recently, the Aadhaar card has become one of the necessary identity proofs in India. However, it is a requirement for individuals who reside in India for 182 days or more within the past 12 months; it is not needed for NRIs to open NRI accounts in India.

How to Open an NRI Account?

Opening an NRI account can be done online or in person, whether it is an NRE or an NRO. For all the major commercial banks, you can fill out the online applications on their websites to start the process.

Generally, you need to fill in your information, passport number, current residence, and contact information, and after its submission, the bank will call you to continue further.

You can also open NRE/NRO bank accounts in person by visiting a bank in India.

Documents Required to Open an NRE/NRO Account

• PAN card copy 
• Passport copy
• Passport-size photograph
• Overseas address proof
• A copy of the visa/permanent residency card/work permit

Before you start the process, you should check with your bank to know any specific requirements and what qualifies for each document.

If you are an NRI and living in a foreign country, you will need to get the required documents attested by the Indian embassy or the signing authority of a commercial bank branch registered in India before you send them to the bank branch in India.

Deposit Money in NRE and NRO Account

There are three different ways to deposit money into your accounts:

• Directly remit from your foreign bank account
• Transferring the funds from an existing NRE account in India to another bank.
• Depositing physical foreign currency at your bank when you visit India

For the investment amount and monthly balance maintenance amount, you can check with your bank online under their NRI services, as it varies by bank.

Penalty for Not Converting Resident Account to NRO Account

If you are leaving India for work purposes, carrying on business abroad, or any other reason that shows you will stay outside the country, then you should convert your existing account into an NRO account.

If you don't convert the account and continue to operate your resident account, then it will be considered a violation of the FEMA Act. The penalty would be up to 3x the sum involved, or up to Rs 2 lakhs if the amount is not directly calculated.

If the situation continues without any resolution, there will be a penalty of Rs 5,000 per day from the first day of compliance until you have paid the penalty.

You should convert your accounts at your local bank as soon as possible to save yourself from the risk of penalties. Also, it is your responsibility to tell your bank about the change in your residential status and to complete the paperwork to change the bank accounts.

Final Thoughts

For NRIs, these accounts help in managing their finances in India while staying in a foreign country. It can be a complicated process for many of the NRIs as it involves a lot of documentation and legal compliance. But they provide many benefits, and hence it is worth going through some hassles for opening them. If you find the process a little difficult to understand, then you can take advice from the experts.

At Visament, the experts have many years of experience, and they can help you with the application process and document submission to open NRI accounts on your behalf. You can apply from the comfort of your home without any hassles.