Non Resident External (NRE) and Non-Resident Ordinary Rupee accounts are two kinds of bank accounts that concern NRIs or Non Resident Indians. They are extremely essential for you on a legal note in case you are an NRI.
According to Indian laws, specifically, Foreign Exchange Management Act (Fema), does not allow you to park your money in regular resident savings account in India once you have achieved the NRI status. This law makes it compulsory for an NRI to have the knowledge and know the NRE and NRO account difference and know which suits you more.
Are you an NRI?
Before you answer your NRE vs NRO dilemma let’s first understand the definition of NRI. It becomes extremely important to know your NRI status before you even know if you need an NRE or NRO account or not because the definition of who is an NRI is different under Fema ACT and under Income Tax Act (ITA)
Who is an NRI under Fema:
NRI as per Fema is a person who is a resident outside India but is a citizen of India.
Who is an NRI under ITA:
Persons who have been in India for 120 days or less OR he/she is in India for a period of 60 days or less even after completing 365 days in the preceding four years.
Therefore, NRIs include those individuals who visited India for less than 120 days in a financial year.
This amendment was brought in the current financial year (FY20-21). Earlier the 120-day threshold was 182 days. However, there is a catch here.
If the total Indian income, that is the income accruing in India, during the financial year is more than Rs 15 lakh, only then the 120 days rule will apply. Visiting NRIs whose total taxable income in India is up to Rs 15 lakh during the financial year, will continue to remain NRIs only if their stay does not exceed 181 days, as was the case earlier.
When can you open an NRE/NRO Account?
You can be classified as an NRI only under Fema to be able to open an NRE or NRO account. You need not be classified as an NRI under Income Tax Act.
How do you open NRO/NRE Accounts?
There are two ways:
1) you can convert your existing savings account to an NRE or NRO Account
2) Or you can open a new one from scratch in case you don’t have regular savings account under your name
One important similarity to note between the two is that both are rupee-denominated bank accounts. All major private and public sector banks offer NRE and NRO bank accounts for NRIs.
Let’s straight away dive into the NRE and NRO account difference:
NRE Account is well suited for those who want to send the money they have earned overseas to India.
This is basically for your foreign currency savings. Your NRE Account can be in the form of a savings bank account, a recurring deposit or a fixed deposit. Your money is converted into Indian currency at the time of deposit.
The interest earned from an NRE account and also the principal amount is exempt from tax in India. It can be opened as a joint account with other NRIs or residents. The amount deposited can be free repatriated to other countries.
This is mainly used by NRIs to meet household expenses back in India. The tax exemption makes it a great investment opportunity. You can repatriate any amount of interest and principal without any restrictions. You can transfer funds from a foreign account to an NRE account as well.
Money kept in NRO accounts also has to be in Indian rupee and money cannot be repatriated to a foreign currency easily. NRO Accounts can be used by NRIs to deposit their earnings in India. This is an important difference between NRE and NRO account. NRE Accounts which are for overseas earnings. Interest earned on this account is taxed at 30% excluding surcharges and any other taxes as applicable under the Income Tax Act. Remittance up to $1 Million (the principal amount) is allowed in a financial year subject to taxes is allowed. While the interest earned on the principal is free repatriable.
The joint account rules remain the same: you can open it with a resident or another NRI. Here, ‘income’ in India can also include pension, rent, dividend etc.
NRE vs NRO Account
|1.||Definition||Non-Resident External (NRE) Accounts are to deposit for overseas earnings||Non-Resident Ordinary Rupee (NRO) Accounts are for depositing income earned in India|
|2.||Denomination||Indian Rupee. This means your foreign currency savings are converted both during deposit and withdrawal.||Indian Rupee|
|3.||Foreign Currency Risk||Yes||No|
|4.||Tax||Exempt. Both principal and interest.||Interest paid to an NRI will be taxed at 30% excluding surcharges.|
|5.||Minimum Balance||Up to Rs 10,000||Up to Rs 10,000|
|6.||Joint Account||With residents or NRIs||With residents or NRIs|
|7.||Repatriability||Funds are completely and freely repatriable||Here repatriability is subject to taxes and only $1 Million in a single financial year is allowed|
|8.||Deposit Rules||Indian income cannot be deposited here||Overseas income cannot be deposited|
|9.||Deposit and Withdrawal Currency||Can deposit in foreign currency and withdraw in Rupee||Both to be in Indian rupee denomination|
NRE vs NRO: What should you go for?
If you are an NRI, NRE vs NRO account does not remain a question anymore but a regulatory necessity. However, you may have to pick between the two accounts depending on your needs. Since there are rules regarding income earned in India and abroad, the decision to pick between the two is not a matter of choice anymore but a matter of technicality and it is pretty simple. If you have income earned overseas you have to open an NRE Account while for your income earned in India you have to keep it in an NRO account.
Why not an ordinary savings account? This doubt may come across your mind and it is legit to have such confusion. By law, as we have mentioned before as well, being an NRI you cannot have ordinary resident savings, fixed deposits or recurring deposits accounts in banks. You necessarily need to have an NRO or NRE account or both, depending on the needs.
You may have to research a bit on which bank to use. All Indian private and public sector banks offer the option of opening NRO and NRE accounts to all NRIs. The laws and rules regarding these banks are almost the same. The difference will come in the quality of service and customer support which will definitely differ from bank to bank so keep your research up to date.