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NRE vs NRO Account - A guide to NRI investing in India
Non-Resident Indians (NRIs) cannot open a regular Savings bank account in India. However, they can open either a Non-Resident External (NRE) account or a Non-Resident Ordinary (NRO) account. If you’re already an NRI or are slated to fall into this category shortly, you need to know the difference between NRE and NRO accounts. This will help you make the right financial decision.
But before we compare NRE vs NRO accounts, it is important to first understand the definition of NRI.
Are you an NRI?
In India, two primary laws define Non-Resident Indians - the Foreign Exchange Management Act (FEMA) and the Income Tax Act (ITA) of 1961. Let’s take a look at what these two laws have to say about NRIs.
Who is an NRI under FEMA?
The Foreign Exchange Management Act defines an NRI as an individual who is residing outside India, but is a citizen of India.
Who is an NRI under ITA?
The Income Tax Act, 1961, goes into further detail about who is eligible to be classified as a Non-Resident Indian. Here’s what this law says:
- If an individual has stayed in India for less than 182 days during a financial year, they’re considered to be a non-resident.
- Alternatively, an individual may also be classified as a non-resident if they have stayed in India for less than 60 days during a financial year, and for less than 365 days during the previous four financial years.
Note:
- If the individual in question is an Indian citizen or a Person of Indian Origin (PIO), then the 60-day cut-off period in point number 2 above shall be substituted by 182 days.
- If the individual in question is an Indian citizen or a Person of Indian Origin (PIO) with a total annual income of more than ₹15 lakhs, then the 60-day cut-off period in point number 2 above shall be substituted by 120 days.
By applying the above-mentioned rules, you can quickly determine whether or not you’re a Non-Resident Indian.
When can you open an NRE/NRO Account?
When it comes to opening an NRE or an NRO account, it doesn’t matter if you’re a non-resident, according to the Income Tax Act, 1961. You can open either of these two accounts only if you’re a Non-Resident Indian as per FEMA laws.
So, before you decide between NRE vs NRO bank accounts, it is advisable to first determine whether you’re an NRI as per the FEMA.
How do you open NRO/NRE Accounts?
You can open an NRO or an NRE account through either of the following two ways:
- By converting your existing regular Savings bank account into an NRE or an NRO account
- By submitting an application for opening a new NRO or NRE bank account
Let’s now quickly take a look at these two accounts before proceeding to analyse the differences between NRE and NRO accounts in detail.
NRE Account
The Non-Resident External (NRE) account is a kind of bank account opened in India in the name of an NRI, to park their foreign earnings. It is a rupee-denominated account. This means that the money that you deposit in this account will be automatically converted to the Indian Rupee at the time of deposit, even if it is in another currency.
Some of the features of an NRE account include:
- Tax-free interest on deposits
- Zero restrictions on the repatriation of funds
- Option to open an NRE account jointly with another NRI or a resident Indian relative
NRO Accounts
A Non-Resident Ordinary (NRO) account is a kind of bank account opened in India in the name of an NRI, to manage the income earned by them in India. It is also a rupee-denominated account. However, it is not as feature-rich as an NRE account.
Here’s an overview of the features of NRO account:
- Taxable interest earned on deposits
- Restriction on repatriation of funds
- Easy access to the funds in the account for resident family members of the NRI
NRE vs NRO Account
We’ve finally come to the most important section of the article - the difference between NRE and NRO accounts. Check out the table below for more information:
| Particulars | NRE Account | NRO Account |
|---|---|---|
| Ideal For | Income earned abroad | Income earned within India |
| Deposit Restrictions | Income earned within India cannot be deposited | Income earned abroad cannot be deposited |
| Currency of Deposit and Withdrawal | Allows you to deposit only foreign currencies and withdraw in Indian Rupee | Both deposit and withdrawal currencies should be in Indian Rupee |
| Forex Risk | Prone to fluctuations in foreign exchange rates since the deposit is in foreign currency | Not prone to any forex risk since both deposit and withdrawal are in Indian Rupee |
| Taxation | Principal deposit amount and interest earned on it are tax-free | Interest earned on deposits is taxed at 30% plus surcharges |
| Restriction on Repatriation | No restriction on the repatriation of funds from NRE accounts | Repatriation of funds from NRO accounts is restricted to $1 million per financial year |
NRE vs NRO: What should you opt for?
The choice between NRE vs NRO bank accounts should be made based on your financial requirements and the purpose for which you wish to use the account. For instance, if you have income sources in India, an NRO account is suitable since the deposit currency would be INR. If you have a family back in India, you can give them access to the NRO account via a mandate, so the funds can be used by them.
Alternatively, if you wish to deposit the income you earn abroad in an Indian Rupee account, you need to open an NRE account. The funds from the account can be repatriated freely without any restrictions, and you also get to enjoy tax-free interest income.
And finally, if you have both Indian and foreign income sources, the question of choosing between NRE vs NRO accounts wouldn’t even arise, since you would need to open both types of accounts.
