Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts are specialized bank accounts created for Non-Resident Indians (NRIs) to manage their income in India and abroad in an effortless manner. They are obligatory for NRIs, as stated by the Foreign Exchange Management Act (FEMA), which does not allow NRIs to hold regular resident savings accounts in India.
Non-Resident External (NRE) account is used for overseas income, whereas Non-Resident Ordinary (NRO) account is used for managing income generated from India. It is important for NRIs to understand the key differences between NRE and NRO accounts to plan their finances and to comply with RBI guidelines.
Read along to understand their features, differences and tax implications.
NRE account stands for Non-Resident External Account, which allows Non-Resident Indians (NRIs) to deposit foreign earnings in India.
NRO Account, on the other hand, stands for Non-Resident Ordinary Account, which allows NRIs to deposit incomes earned in India, such as rent, dividends or pensions.
An NRE account is a Non-Resident External Account used by NRIs to manage their overseas income easily in Indian denominations. Deposits/funds in NRE accounts are completely tax-free, i.e., the principal amount and interest earned are exempt from taxation. Even NRIs can easily repatriate/transfer the NRE balance abroad without restrictions.
Here are some key features of a NRE account:
An NRO account is a Non-Resident Ordinary Account that allows NRIs to manage their earnings from India, which includes rent, pensions, dividends, or any other local source of income. The NRO balances are held in Indian currency but are subject to taxation.
Here are some key features of a NRO account:
There are two ways to open an NRO or an NRE account. They are:
All major private and public sector banks offer NRE and NRO bank accounts for NRIs.
The following table highlights the key differences between NRE and NRO accounts:
NRE vs NRO Account |
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Parameters |
NRE Account |
NRO Account |
Purpose |
To deposit their overseas earnings in India. |
To deposit income earned in India. |
Denomination |
Indian Rupee. This means your foreign currency savings are converted both during deposit and withdrawal. |
Indian Rupee and Foreign Currency. |
Tax |
Both the principal amount and interest earned on it are exempted from tax. |
The interest earned on deposit is subject to TDS (Tax Deductible at Source). Credit balances subject to respective income tax slabs. |
Joint Account |
Can be opened only with another NRI. |
Can be opened with a resident Indian (a close relative) or an NRI. |
Repatriability |
Funds in NRE accounts are completely and freely repatriable or transferable. |
Here, repatriability is subject to taxes, and only $1 Million in a single financial year is allowed for transfer. |
Deposit and Withdrawal |
Can deposit funds in foreign currency and withdraw in INR. |
Deposit can be either in foreign and Indian currency. However, the withdrawals can only be made in INR |
The Non-Resident Indians (NRIs) are allowed to have two types of bank accounts in India: the Non-Resident External (NRE) account and the Non-Resident Ordinary (NRO) account. However, the tax implications on these accounts are different from each other.
The NRE account is mainly used to deposit your foreign income in India. Here, both the principal and the interest earned on this income is tax-free. As a result, a NRE account is an attractive option among NRIs wishing to invest or save their overseas earnings in India without incurring tax liabilities.
On the other hand, the interest earned on an NRO account is taxable in India at 30% (along with applicable surcharge and cess), which can be lowered under the terms of Double Taxation Avoidance Agreements (DTAA) between India and the resident country of the NRI. Thus, while the NRE account provides tax-free growth for foreign income, the NRO account is necessary for managing domestic income but with tax liabilities.
Choosing between an NRE account and NRO account is solely dependent on your financial goals, source of income and tax considerations as an NRI.
Here are some of the instances where you could benefit from an NRE Account -
You could consider to opt for an NRO Account if -