Difference Between NRE and NRO Account

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  • 08 Jun 2023

In today's interconnected world, with increased globalization and cross-border financial transactions, it is essential to have a clear understanding of various banking terms and services. Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts are two significant avenues for non-resident Indians (NRIs) to manage their funds in India. Read on to know the difference between NRE and NRO accounts which will help you as a non-resident Indian (NRI) to manage your finances effectively.

The NRE account keeps the foreign currency earned in the Indian rupee denomination and provides complete security. It is an Indian rupee-denominated account that enables quick conversion of foreign currency to INR when a person deposits foreign money. Individuals must ensure that the amount deposited into the NRE account is earned outside India. Joint accounts can also be opened, but the joint account holder must be an NRI.

NRIs in India hold an NRO account to actively manage their income earned from various sources such as pensions, dividends, rental income, and more. Account holders can easily deposit and manage their accumulated rupee funds. The main advantage of an NRO account lies in its ability to receive funds in foreign or Indian currency. Individuals have the option to open an NRO account jointly with an Indian resident or another NRI, and they can also transfer funds from their existing NRE account.

NRE vs NRO: Key Differences

  • Purpose

NRIs can use an NRE bank account to transfer their foreign earnings to India in Indian rupees.

An NRI can use an NRO account as a savings account to manage the income earned in India, including pension, rental income, dividend income, etc., in Indian rupees.

  • Repatriability

An NRE account allows for full repatriability of all deposits made to it, including the interest earned.

NRO accounts impose repatriation limits, allowing individuals to repatriate up to USD 1 million in a fiscal year from an NRO account, subject to the payment of all applicable taxes.

  • Taxability

An NRE account exempts all deposits from income tax, including both the principal amount and the earned interest.

Interest earned on an NRO account is subject to tax deducted at source (TDS).

  • Account holding

Two NRIs or an NRI and a resident Indian citizen can hold an NRE account jointly.

An NRI can open an NRO account, either individually or jointly, with an Indian citizen or other NRIs.

  • Fund transfer

One can transfer funds from one NRE account to another, as well as from an NRE account to a resident account or an NRO account.

An NRO account allows for the transfer of funds only to another NRO account or a resident account, but not to an NRE account.

  • Exchange rate risk

Exchange rate risks, including fluctuations and conversion losses/gains, affect an NRE account.

Although foreign income can also be transferred to an NRO account, daily exchange rate fluctuations are less likely to affect it. However, the NRO account is not always free from the risk.

NRE vs NRO Account: Which is Better?

Choosing the right account as an NRI is not a matter of universal right or wrong. Instead, it requires careful consideration of your individual needs and income sources.

An NRE bank account is suitable for converting and holding foreign currency in Indian rupees. An NRO account, on the other hand, is designed to accommodate both foreign income and income earned within India. It's important to note that NRO accounts have a repatriation limit of up to USD 1 million per financial year, whereas NRE accounts do not impose such restrictions.

FAQs

An NRE (Non-Resident External) account is a bank account available to non-resident Indians (NRIs). It is used to hold and manage foreign income in India. The account is maintained in INR and is fully repatriable, meaning funds can be freely transferred back to foreign currency at any time.

An NRO (Non-Resident Ordinary) account is also a type of bank account available to non-resident Indians (NRIs). It is primarily used to manage income earned in India, such as rent, dividends, or pension, by individuals who are not residing in India. The account can hold funds in Indian Rupees and has limited repatriability.

The primary difference lies in the purpose and nature of the funds held in these accounts. An NRE account is used to hold and manage foreign income, while an NRO account is used to manage income earned in India. NRE accounts are fully repatriable, allowing funds to be freely transferred back to the foreign currency, whereas NRO accounts have limited repatriability.

Yes, as an NRI, you can hold both NRE and NRO accounts simultaneously. It allows you to manage and segregate your foreign income and Indian earnings efficiently. However, it's essential to comply with the regulations and guidelines set by the RBI regarding the maximum permissible balances and transactions in these accounts.

Visit the nearest bank branch that offers NRE and NRO account opening facilities with the required documents. Fill up the application form and provide the relevant documents. Your account is opened upon successful verification from the bank.

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