Under the Foreign Exchange Act, an NRI cannot maintain a regular savings account. They are required to convert their existing savings account into either an NRE or NRO account. Continuing to operate a regular savings account after becoming an NRI can result in significant penalties. Choosing an NRE or NRO account provides a convenient way for NRIs to manage their finances in India. These accounts enable them to receive and manage foreign earnings in India while also maintaining income earned within India in their home country.
What is an NRE Account?
A Non-Resident External (NRE) Account is an Indian rupee-denominated bank account that NRIs (Non-Resident Indians) can open in India to hold their foreign currency earnings. NRE accounts are available in different forms, including savings accounts, current accounts, recurring deposits, and fixed deposits. These accounts can be opened individually or jointly, although joint accounts are restricted to NRIs.
NRE accounts provide high liquidity, enabling NRIs to repatriate their funds to their country of residence easily and without restrictions. In addition, the interest earned on NRE accounts is completely tax-free, making them an attractive tax-efficient option for NRIs managing their foreign earnings in India.
What is an NRO account?
A Non-Resident Ordinary (NRO) account is used by NRIs to manage income earned in India, such as interest, dividends, rent, and other domestic earnings. Deposits can be made in both foreign and Indian currency, while withdrawals are permitted only in Indian currency. However, funds held in an NRO account cannot always be freely repatriated in foreign currency.
NRO accounts are available as savings accounts, current accounts, and fixed deposit accounts. NRIs can open these accounts jointly with either a resident Indian or another non-resident Indian. NRO accounts also make it easier to invest in mutual funds and other financial instruments, while loans against NRO fixed deposits may be available at lower interest rates than regular loans.
How to deposit and withdraw funds from an NRE and NRO account
For deposits, an NRE account allows funds earned abroad in foreign currencies, such as USD or EUR, to be deposited through the bank. The bank converts the foreign currency into INR and credits the converted amount to the account. However, Indian rupee income earned within India cannot be directly deposited into an NRE account. In comparison, an NRO account offers greater flexibility, as deposits can be made in both Indian rupees and foreign currencies. As with NRE accounts, foreign currency deposited into an NRO account is converted into INR. For withdrawals, both NRE and NRO accounts permit withdrawals only in Indian rupees. Funds can be withdrawn through ATMs using a debit card, online banking transfers, cheques payable to yourself or a third party, or directly at a bank branch.
Tax implications and exemptions of NRE and NRO account
The NRE (Non-Resident External) Account provides several tax benefits. Interest earned on the account is completely tax-free in India, including interest accrued on the account balance. Both the deposited principal and tax-free interest can be freely repatriated abroad without tax implications. NRE accounts are also exempt from wealth tax and gift tax on both the principal and interest. However, one limitation is that the account cannot be directly used for spending in India without converting the funds into INR, and the applicable conversion method may have tax implications.
The NRO (Non-Resident Ordinary) Account is treated differently for tax purposes. Interest earned is subject to Tax Deducted at Source (TDS) at 30%, or a lower rate where applicable under a Double Taxation Avoidance Agreement. The bank generally deducts the applicable tax when the interest is credited to the account. Repatriation is permitted up to USD 1 million per financial year after payment of applicable taxes on the interest earned, while amounts exceeding this limit may attract additional tax implications. Unlike NRE interest, interest earned on an NRO account is taxable in India and does not qualify for the same exemptions. However, NRO accounts allow direct use of funds for expenses in India without requiring currency conversion, which is a key advantage.
Main Differences and Similarities Between NRE and NRO Accounts
NRE and NRO accounts differ in several ways while also sharing certain common features, as shown below:
| Feature | NRE Account | NRO Account |
|---|---|---|
| Tax on Interest | Completely tax-free | Subject to TDS (30% or lower) |
| Repatriation | Full principal and interest | Up to USD 1 million/year after tax |
| Currency | Foreign currency only | Any currency |
| Spending in India | Not allowed (requires conversion to INR) | Allowed directly |
| Tax Exemptions | Wealth tax, gift tax | None |
| Suitability | Saving & repatriating foreign income | Managing income & expenses in India |
Tips and recommendations on how to choose the right account for different needs and goals
NRE and NRO accounts provide different features and operate differently, so the appropriate account should be selected based on your individual requirements and financial objectives:
NRE Account (Non-Resident External Account):
- Ideal for transferring foreign earnings to India without creating tax liabilities.
- Accepts foreign credits from outside India and provides tax-free interest earnings.
- Allows the principal and interest to be freely repatriated to a foreign account.
- Suitable for individuals who need to manage income earned outside India.
NRO Account (Non-Resident Ordinary Account):
- Suitable for managing income earned in India, including rental income, dividends, pensions, and interest.
- Allows both foreign currency and Indian rupee credits from sources within India.
- Interest earned is taxable at 30%, while repatriation of the principal is restricted to USD 1 million annually.
- Appropriate for individuals who need to manage income generated in India.
Joint Account: If you want to open a joint account with another NRI or a resident Indian, an NRO account is an appropriate option. An NRE account can only be held jointly with another NRI.
Investments in India:
- Both NRE and NRO accounts can be used to invest in mutual funds, stocks, and other securities in India. The appropriate account depends on the source of the funds.
- A separate NRI trading account may be required for investing in the Indian stock market.