7 Key Difference between NRE and NRO accounts for NRI in India

First, let’s understand the basic meaning of Non Resident Indian (NRI).A person who is not a resident of India , is non-resident of India (NRI). In the case of an individual, a person is considered to be NRI if he stays in India for less than 180 days in preceding financial year or includes people who left India for employment, business or any other reason for an indefinite period.

If you are NRI, you will have different banking and investment needs. It becomes difficult to manage accounts and to repatriate money as per need. And hence many banks in India offer the facility of opening NRI accounts which can address NRIs needs. A NRI account in India is a bank account opened by NRI with a bank or financial institution authorised by RBI. NRE and NRO accounts for NRI have different purposes.

NRI can open following types of accounts in India depending upon its requirements –

Non-resident External Account (NRE)
Non-resident Ordinary Accounts (NRO)
Foreign Currency Non-resident Accounts (FCNR)

What is NRE account?

Non Resident External (NRE) account is an account used to park your foreign earnings in Indian rupee denomination. So, it can also be referred to as an Indian rupee denominated account.Whatever foreign currency money is deposited by NRI in an account gets quickly converted into INR at prevailing exchange rate. .But it becomes mandatory that any amount deposited in an NRE account must be earned outside India.This account is preferred by NRI to carry business, personal banking and investment in India.

NRI can open NRE accounts in any form such as savings, fixed deposits and recurring. Main feature of the account is “International Debit Cards” provided to these account holders which can be used 24X7.Also,In Case of repatriation of funds, NRI can transfer interest or principal amount from NRE account to their foreign account without any restrictions. The interest income earned on the amount in an NRE accountdoes not attract any tax implication i.e it is taxfree.

What is an NRO account?

Non-Resident Ordinary account is a popular account used by NRI to manage their deposit or income earned in India. Such income earned in India can include rent, dividend, pension,etc. It can be opened as savings,current or deposit.NRO accounts are kept in Indian currency.

Main feature of the account is, It is possible to receive funds in any foreign / indian currency in this account. But for withdrawal only Indian currency is allowed.The interest income earned on NRO account is taxable at 30% deductible at source.In the repatriation case, NRO account holder can freely transfer interest earned on account balance and principal is repatriable subject to specified limit for the financial year.

Need to open NRE and NRO account:

According to RBI recent guidelines, Non resident individuals (NRI) are not allowed to open and transact through regular saving accounts used by residents. So, for NRI to transact in India it becomes mandatory to have a NRI account in India. Some other points can be-

Remitting foreign income to India: Both NRE Account and NRO Account, can receive foreign currency credits. If the purpose of opening a bank account is to facilitate easy transfer of foreign income to India, NRIs can open NRE or NRO accounts as both are at par in this case.

Repatriation of funds : These Accounts allow the NRI to freely repatriate the interest income without any restrictions. However, incase of the principal amount, only the NRE Account allows the repatriation of the funds without any limit. The balance outstanding in NRO Account, excluding the interest income, is subject to prescribed limits..

Elimination of currency risk :Incase NRI wants to remit funds to India to utilise such funds in India itself, both NRE and NRO Accounts option are available for the NRI to eliminate the currency risk. As amount received in the both account is converted into Indian currency at that timeof receipt and thereafter the balance is carried forward in Indian currency only.

What is difference between NRE and NRO accounts of NRI

Basis Of Difference	NRE Account	NRO Account
Taxation	Tax-free Principal amount and interest earned thereon is fully exempt.	Interest earned in NRO accounts and credit balances is subject to the respective income tax bracket.
Fund Transferability	No restriction on transfer of funds from one NRE account to another NRE account. Can also be transferred to a resident as well as an NRO account.	Funds from an NRO account can only be transferred to an NRO account and to a resident account. But, not to an NRE account
Exchange Rate Risk	Get affected by exchange rate risk.	Generally not affected by daily exchange fluctuations.
Repatriability	Fully repatriable All deposits to account including interest and principal are fully repatriable	Partially repatriable Repatriation limits are imposed on principal amount repatriation. Interest can be repatriated fully.
Joint account holding	Allowed only if both parties are NRIs.	Allowed with NRI or resident Indian being close relative of NRI
Suitable Conditions	Go for NRE Accounts if you want to hold your overseas earnings in Indian currency..	Go for NRO Accounts if you want to keep your earnings from India inINR only.

NRE or NRO: How to choose?

While NRO andNRE both are NRI accounts, they both serve different purposes. And there are no specific universal right wrong for any account. NRI should arrive at a decision based on your unique needs and income sources.

Generally NRI should opt for NRE account option if:

You want to remit your overseas earnings to India
Maintain your money in Indian currency but with liquidity
Want to hold jointly with another NRI
Want to repatriate it without tax compliance

Generally NRI should opt for NRO account option if:

NRI want to maintain earnings from India in INR and in India only
Want to deposit income earned in India such as dividend, rent,etc.
Want to jointly own account with any resident Indian (close relative)

FAQ related to NRE and NRO accounts of NRI

1.What is the primary role of an NRE account?

An NRE account primarily used to convert foreign currency to INR. A person depositing foreign money in his NRE account will be converted to INR without any delay.

2.Can NRIs have both NRE and NRO accounts ?

Yes, NRIs can have both NRE and NRO accounts in India. You can even open and maintain multiple accounts with different banks also.

3.What are the disadvantages of NRO account?

When NRI earns interest income from NRO Account that is not tax exempt. This biggest disadvantage of NRO account.

4. What are the disadvantages of NRE account?

Money Deposit in NRE account is subject to foreign exchange conversion. Hence banking charges shall be applicable for such transfer. Also currency fluctuation risk is there.

5. How long can NRI can keep money in NRE?

A NRI Can keep funds as long as in NRE account as long as one is a non-resident under the provisions of Foreign Exchange Management Act (FEMA).

6.How much money NRI can send to NRE account in Year ?

In one financial year NRI can transfer to NRE account within USD 1 Million.

7.Who Cannot open an NRE account?

Resident person of India cannot open NRE Account.

8.Which is better NRO or NRE account ?

There different purposes of NRE and NRO account. As NRI you need both accounts to manage funds.

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AMIT BHUTADA

CA Amit Bhutada Owner at A N Bhuatda & CO having +10 years of experience and expertise in the hardcore profession of Accountancy and Taxation. He has in his credit experience in the field of Income Tax, Audit,Clound Accounting, Company Law Matters, Financial Services, GST, International Taxation , Goods & Services Tax (GST), GST Audit, etc.

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