NRE and NRO Account: Full Form, Feature & Key Differences

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 and NRO Account Full Form

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.

What is an NRE Account?

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.

Features of NRE Account

Here are some key features of a NRE account:

• NRIs can hold their overseas income in the NRE account. 
• The principal and interest are fully repatriable and tax-free.
• NRIs can only deposit their foreign income in a Non-Resident External Account, which can be easily converted or withdrawn into Indian currency.
• A Non-resident Indian (NRI) can hold a joint NRE account with only any other NRI but not with a resident Indian.
• It can be subject to exchange rate fluctuations because the NRE balances are held in Indian currency.

What is an NRO 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. 

Features of NRO Account

Here are some key features of a NRO account:

• The funds deposited in an NRO account can be held in Indian currency.
• The principal amount in an NRO account is partially repatriable, i.e.,  only $1 million per financial year is repatriable/transferable abroad as per the RBI compliance.
• Interest earned is subject to Tax Deducted at Source (TDS). However, you can enjoy the benefit of reduced tax under DTAA.
• NRIs can deposit both their overseas income as well the income generated from India. However, withdrawals can only be made in Indian currency.
• NRIs can open/hold an NRO account jointly with another NRI or a Resident Indian (a close relative).
• It can be subject to exchange rate fluctuations because the NRO balances are held in Indian currency.

How do you open NRO/NRE Accounts?

There are two ways to open an NRO or an NRE account. They are:

1.  Converting your existing savings account to an NRE or NRO Account
2.  Opening a new one from scratch in case you don’t have a regular savings account under your name

All major private and public sector banks offer NRE and NRO bank accounts for NRIs.

Difference between NRE and NRO Account

The following table highlights the key differences between NRE and NRO accounts: 

Taxation on NRE and NRO accounts

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.

NRE vs NRO - Which Account Should You Choose?

Choosing between an NRE  account and NRO account is solely dependent on your financial goals, source of income and tax considerations as an NRI.

When to Opt for an NRE Account?

Here are some of the instances where you could benefit from an NRE Account -

• You have an income abroad and wish to save or invest in India while maintaining the funds as fully repatriable.
• You are looking for tax-free earnings on the interest earned. Here, both the interest and principal amount are free of income tax.
• You want to transfer funds to India and withdraw it in INR without any tax liability.
• You don't have income in India that has to be deposited.

When to Opt for an NRO Account?

You could consider to opt for an NRO Account if -

• You have a source of income in India, like rent, pension, dividends, etc.
• You are comfortable with partial repatriation of funds. NRO accounts allow transfers only up to $1 million per financial year post taxation.
• You deposit frequent transactions in India which include rent, expenses, loans, or bills.