Difference between NRE and NRO accounts

Do you know that as a Non-Resident Indian (NRI), you are not allowed to hold or operate a regular bank account? As per the Foreign Exchange Management Act (FEMA) of 1999, you will need a Non-Resident External (NRE) or a Non-Resident Ordinary (NRO) bank account for financial transactions in India.

You could be pondering which of the two accounts is right for you. A comparison between the NRE vs NRO accounts can guide you in taking the right decision. Below are the differences between NRE and NRO accounts based on different parameters:

Purpose

An NRE account allows you to park your foreign earnings into an Indian bank account. You can deposit funds in a foreign currency in your NRE bank account, and it automatically gets converted into Indian rupees.

On the other hand, an NRO account allows you to hold and manage your earnings made in India. You can use your NRO bank account to deposit income from rent, mutual funds, dividends, interests, etc. Withdrawals from both NRE and NRO accounts are allowed only in Indian rupees.

As per FEMA regulations, an NRE or NRO account is mandatory for NRIs willing to invest in Indian investment instruments.

Taxation

Deposits made into an NRE account are tax-free. The principal amount deposited into an NRE account and the interest earned on it are exempted from income tax. On the other hand, the interest earned on the deposits made into an NRO account is taxable at a 30% rate, deducted at the source.

Repatriability

All deposits made into an NRE account, including the principal amount and the interest earned, are fully repatriable. It means there is no limit on the amount you can transfer to your resident country from an NRE account.

On the other hand, an NRO account comes with a repatriation limit. You can transfer only up to 1 million US dollars from your NRO account in a given financial year after paying applicable taxes.

Account structure

You can open an NRE account individually or jointly with another NRI. You cannot open a joint NRE account with an Indian resident. It’s because NRE accounts are suitable only for those who have foreign income.

On the other hand, you can open an NRO account individually or jointly with another NRI or a resident Indian on a ‘former’ or ‘survivor’ basis. NROs accounts are useful for those who want to manage their income from an Indian source.

Funds transfer

You can transfer funds from your NRE account to another NRE account or an NRO account. However, funds from an NRO account can only be transferred to another NRO account. You are not allowed to transfer funds from an NRO account to an NRE account.

Exchange rate fluctuations

The deposits made into an NRE account are prone to foreign currencies’ exchange rate fluctuations. It means that any change in the exchange rate of your local currency will impact the deposit value in your NRE account.

On the other hand, the deposits made into an NRO account are not impacted by currency exchange rate fluctuations. Any changes in the Forex exchange rate of your local currency may impact the savings made in your NRO account.

NRE vs NRO – What should you choose?

After learning the differences between the NRE and NRO, you should be able to decide which would best suit your needs. Your decision should be based on your precise needs and purpose. If you want a bank account to store and manage your income generated in India, you will need to open an NRO bank account.

However, if you only want to park your income in a foreign currency into an Indian bank account, an NRE account will be more useful. The deposits made into an NRE account are free from income tax and are fully repatriable.

To conclude

As an NRI, you can open an NRE or an NRO account to convert your foreign income into Indian rupees. You can also use them to invest your foreign income in India and earn higher returns. The purpose of both these accounts is to help you manage your money seamlessly.

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