According to the Foreign Exchange Act, an NRI cannot have a regular savings account. They have to switch their savings account either into an NRE or NRO account; if an NRI continues to Use his savings account, it can lead to hefty penalties. Opting for an NRE or NRO account becomes a convenient solution for NRIs. These accounts allow them to receive and manage their foreign earnings in India seamlessly and keep income earned within India in the home country.
What is an NRE Account?
A Non-Resident External (NRE) Account is an Indian rupee-denominated bank account that NRIs (Non-Resident Indians) can open in India to deposit their foreign currency earnings. NRE accounts can take various forms, including savings accounts, current accounts, recurring deposits, and fixed deposit accounts. These accounts can be opened individually or jointly, with joint accounts limited to NRIs.
NRE accounts offer high liquidity, allowing NRIs to repatriate funds to their country of residence easily and completely. Additionally, the interest earned on NRE accounts is entirely tax-free, enhancing the appeal of these accounts for NRIs seeking a tax-efficient option for managing their foreign earnings in India.
What is an NRO account?
A Non-Resident Ordinary (NRO) account serves as a means for non-resident Indians to manage income earned in India, including interest, dividends, rent, etc. This account allows deposits in both foreign and Indian currency, but withdrawals can only be made in Indian currency. However, not all deposits in an NRO account can be freely repatriated into foreign currency.
NRO accounts are versatile and available in the form of savings accounts, current accounts, or fixed deposit accounts. NRIs can open NRO accounts jointly with either a resident or non-resident Indian. This account facilitates easy investment in mutual funds and other financial instruments, and individuals can obtain loans against NRO fixed deposits at lower interest rates compared to regular loans.
How to deposit and withdraw funds from an NRE and NRO account
When it comes to deposits, the NRE account allows the deposition of funds earned abroad in foreign currency, such as USD or EUR, at the bank branch. The bank will then convert these foreign funds into INR and credit them to your account. However, direct deposits of Indian rupees earned in India are not permissible in an NRE account. On the other hand, the NRO account provides more flexibility, allowing deposits in any currency, including both Indian rupees and foreign currency. Similar to NRE accounts, foreign currency deposits in an NRO account will be converted to INR. Moving on to withdrawals, for both NRE and NRO accounts, withdrawals can only be made in Indian rupees. These withdrawals can be facilitated through various means, including ATMs with your debit card, online banking transfers, writing a cheque payable to yourself or a third party, or in person at a bank branch.
Tax implications and exemptions of NRE and NRO account
The NRE (Non-Resident External) Account offers several advantages: the interest earned is completely tax-free in India and applicable to any accrued interest on the account balance. Both the principal amount deposited and the tax-free interest can be freely repatriated abroad without any tax implications. NRE accounts also enjoy exemptions from wealth tax and gift tax on both the principal amount and interest earned. However, a drawback is that it cannot be used for spending in India unless converted to INR, potentially incurring taxes depending on the conversion method.
On the other hand, the NRO (Non-Resident Ordinary) Account operates differently. Interest earned is subject to Tax Deducted at Source (TDS) at 30% (or a lower rate as per applicable Double Taxation Avoidance Agreements), with the bank automatically deducting this tax when crediting interest to the account. Repatriation is allowed up to USD 1 million per financial year after paying applicable taxes on the interest earned, and any amount exceeding this limit is subject to additional taxes. Unlike NRE accounts, interest earned on NRO accounts is considered taxable income in India and does not enjoy any exemptions. However, NRO accounts can be used for expenses in India directly without currency conversion hassles, providing a notable benefit.
Main Differences and Similarities Between NRE and NRO Accounts
NRE and NRO accounts have some differences and similarities as below table:
Feature | NRE Account | NRO Account |
Tax on Interest | Completely tax-free | Subject to TDS (30% or lower) |
Repatriation | Full principal and interest | Up to USD 1 million/year after tax |
Currency | Foreign currency only | Any currency |
Spending in India | Not allowed (requires conversion to INR) | Allowed directly |
Tax Exemptions | Wealth tax, gift tax | None |
Suitability | Saving & repatriating foreign income | Managing income & expenses in India |
Tips and recommendations on how to choose the right account for different needs and goals
NRE and NRO both account offer different facilities and work in different ways; you must choose one of these accounts based on your personal needs and preferences:
NRE Account (Non-Resident External Account):
Ideal for transferring foreign earnings to India without incurring taxation liabilities.
Allows only foreign credits from outside India, ensuring tax-free interest earnings.
Enables free repatriation of both principal and interest amounts to a foreign account.
Suitable for individuals seeking to manage income earned abroad.
NRO Account (Non-Resident Ordinary Account):
Suitable for managing income earned in India, such as rental income, dividends, pensions, and interest.
Allows both foreign and rupee credits from within India into the account.
Interest earned is taxable at a rate of 30%, and repatriation of the principal amount is limited to USD 1 million annually.
Appropriate for individuals looking to handle income generated within India.
Joint Account: If you wish to have a joint account with another NRI or a resident Indian, an NRO account is a suitable choice. An NRE account can only be opened jointly with another NRI.
Investments in India:
Both NRE and NRO accounts can be used for investing in mutual funds, stocks, or other securities in India. The choice depends on the source of funds.
A separate NRI trading account may be required to access the Indian stock market.
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