NRE VS NRO: Selecting the Right Bank Account for NRIs

NRE and NRO accounts are two types of bank accounts that can be opened by Non-Resident Indians (NRIs) to manage their finances in India. While both accounts offer benefits to NRIs, they differ in their purpose, currency, repatriation, taxation, and joint account features. In this article, we will analyze NRE vs NRO accounts in more detail, particularly as it pertains to business and commercial transactions.

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NRE VS NRO Account

The Non-Resident External (NRE) and the Non-Resident Ordinary (NRO) Account are fundamentally very different. Let’s start with understanding their definitions in a very simple way.

Non-Resident External (NRE) Account

The NRE Account is used to maintain the income earned outside India. The account is maintained in INR and is subject to currency conversion/ exchange rate fluctuations as you will be depositing money in foreign currency. The interest earned on the deposits is tax-free in India and is completely and freely repatriable.

Also Read: Latest NRE FD Interest Rates

Non-Resident Ordinary (NRO) Account

The NRO Bank Account is used to maintain the income generated in India. This account is also maintained in INR. Since, you deposit your income that is generated in India, there is tax on an NRO account. The interest earned is taxable at 30% along with surcharge and cess which is deducted at source (TDS). This deduction is refundable as per your tax slab. There is a limit of US$ 1 million per financial year for repatriation. 

Check Out: Process of repatriation from NRO Bank Account

Difference Between NRE and NRO Account

Check out the grid to understand the differences between NRE and NRO Bank Accounts:

Difference between NRE and NRO Account

Purpose:

NRE accounts are primarily used to park foreign earnings in India. This can include money earned from overseas jobs, business profits, or any other foreign income. The funds in an NRE account are freely repatriable, meaning they can be transferred back to the foreign country in the original foreign currency without any restrictions. NRE accounts can also be used to make investments in India, such as buying stocks, mutual funds, or real estate.

NRO accounts, on the other hand, are used to manage income earned in India. This can include rent from property, dividends, pension, or any other income that is earned in India. The funds in an NRO account are not freely repatriable, and there are restrictions on how much money can be repatriated back to the foreign country. NRO accounts can also be used to make local payments in India, such as paying bills or making purchases.

Currency

NRE accounts are maintained in Indian rupees but the funds deposited are held in a foreign currency, such as US dollars or British pounds. This means that the funds in an NRE account are not subject to exchange rate fluctuations, and the account holder can benefit from a favorable exchange rate. Any interest earned on an NRE account is also tax-free in India.

NRO accounts, on the other hand, can be maintained in Indian rupees only. The funds deposited in an NRO account are subject to exchange rate fluctuations, and any interest earned on the account is subject to Indian income tax.

Repatriation

The funds in NRE accounts are fully repatriable, which means they can be transferred back to the foreign country in the original foreign currency, without any restrictions. This makes NRE accounts an ideal choice for NRIs who want to bring their foreign earnings back to their home country. There is no limit to the amount of money that can be repatriated from an NRE account.

NRO accounts, on the other hand, have limited repatriation options. The funds in an NRO account can be repatriated up to a limit of USD 1 million per financial year, subject to certain conditions. The limit of USD 1 million is a cumulative limit for all repatriable assets held by the NRI, including NRO balances, sale proceeds of assets, and investments made through NRE/FCNR accounts.

Taxation:

Interest earned on NRE accounts is tax-free in India, which makes it an attractive option for NRIs who want to earn tax-free income. The interest earned on an NRE account is not subject to Indian income tax, wealth tax, or gift tax.

The interest earned on an NRO account, on the other hand, is subject to Indian income tax. The tax is deducted at source (TDS) by the bank, and the NRI can claim a tax credit in their home country if there is a double taxation avoidance agreement (DTAA) between India and their home country. However, if there is no DTAA, the NRI may have to pay tax in both countries.

Joint account:

NRIs can open NRE and NRO accounts jointly with other NRIs or Resident Indians. However, the mode of operation for the NRE account should be either “Either or Survivor” or “Former or Survivor,” while for NRO accounts, it can be “Either or Survivor,” “Former or Survivor,” or jointly.

Advantages of NRE and NRO Accounts

NRE Account

Here are the key advantages of NRE accounts for NRIs:

1. By opening a Non-Resident External (NRE) bank account, you can maintain your foreign currency savings in Indian rupees.
2. Funds in NRE accounts can be freely and completely repatriated from India to any foreign country without the need for currency conversion. Both the principal and interest can be transferred without any restrictions.
3. NRE accounts are not subject to taxation. This means that both the principal amount and the interest earned on the account are tax-free in India.
4. NRE accounts allow for various types of transactions, including personal, business-related, and investment-related needs. You can also use an NRE bank account to directly invest in India.
5. Non-resident Indians have the convenience of using an international debit card to withdraw funds from their NRE bank accounts at any time.
6. NRE accounts can be jointly held with another non-resident Indian (NRI).

NRO Account

Given below are the benefits of an NRO Account:

1. With an NRO Account, you can effortlessly handle the income generated in India from various sources like pension, rental income, etc. It provides a convenient solution to maintain Indian income.
2. Earn attractive interest rates, with potential returns of up to 7.30%*, on the funds held in your NRO Account through fixed deposits. This interest can significantly enhance your funds in the account.
3. An NRO Account offers you the opportunity to invest in various avenues like Mutual Funds, IPOs, and other investment instruments on a non-repatriable basis.
4. By linking your NRO Account to a PIS Account, you can engage in trading Indian stocks listed on recognized stock exchanges, broadening your investment options.
5. Opening an NRO Account is effortless and convenient. You can download the account opening form online and send the required documents to the bank branch via courier, simplifying the process.
6. You are not required to maintain high balances in your NRO Account. Most banks set a minimum balance requirement of just Rs. 10,000.

Disadvantages of NRE Account and NRO Account

NRE Account

NRE Accounts are denominated in Indian rupees, and any foreign exchange remittances received are initially converted into Indian rupees based on the buying rates set by the banks. If you wish to make a withdrawal in foreign currency, the bank will convert the Indian rupees in your account into the desired foreign currency at the selling rate. It’s important to note that all funds in the account are maintained in Indian rupees, which means they are susceptible to fluctuations in exchange rates, exposing them to exchange fluctuation risks.

NRO Account

The interest accrued on balances in NRO Accounts is subject to Indian Income tax. The bank deducts income tax at the source (TDS) when disbursing the interest payment. Additionally, the balance held in an NRO account cannot be repatriated freely, and any remittance in foreign currency requires prior approval from the Reserve Bank of India. In essence, the funds in an NRO account remain restricted within India without the option for easy transfer or repatriation.

Convert Resident Account into NRO Account

Did you Know? You will have to open a new NRE Bank Account but you can convert your resident savings account into an NRO Account. The process to convert your resident savings account into an NRO Account is simple. 

Also, as NRIs you can’t hold a resident account. Therefore, you must inform the bank about the change in your residential status. 

NRE to NRO Fund Transfer

Transfer of funds can be done from NRE to NRO Account. An NRE account allows you to transfer funds to another NRE account as well as an NRE to NRO fund transfer. There are no taxes on NRE to NRO Transfer. You can transfer money to NRO Account without any hassle.

NRO to NRE Fund Transfer

Transfer of funds can be done from NRO to NRE Account. An NRI can transfer funds from NRO to NRE account after providing proper documentation stating that all the taxes are paid on the funds being transferred to the NRE Account because both the principal and interest earned on NRE Deposits are fully and freely repatriable.

NRO VS NRE: Which one to choose?

Choosing the perfect NRI Account is completely driven by purpose. Here are pointers for you to make it simpler.

Choose an NRE Account if:

• You have a source of income abroad
• You want to maintain your earnings from abroad in INR
• You want to earn tax-free interest on deposits (up to 7.50%*)
• You want to invest in Indian markets on a repatriable basis
• You want to open a joint account with another NRI
• You want free and complete repatriation to any currency
• Your repatriation amount exceeds US$ 1 million per year

Choose an NRO Account if:

• You have a source of income in India
• You want to earn interest in deposits (up to 7.30%*)
• You want to hold your Indian earnings with no plan to utilize them in your country of residence
• You want to invest in Indian Markets on a non-repatriable basis
• You want to open a joint account with another NRI or Resident Indian
• Your repatriation amount per year is less than USD 1 million USD

Also Read: NRI Investment in India: 5 Best Investment Options for NRIs

Can I hold both NRE and NRO Account as an NRI?

Yes. You can hold both NRE and NRO Account as an NRI if you have the need for it. Both these accounts offer flexibility and serve their purposes. As an NRI, it is essential to understand and plan your banking and investments. At SBNRI, we understand your needs and cater to them end to end.

Best NRE account in India

While most Indian banks offer NRE and NRO accounts, some of them offer better services in terms of interest rates, minimum balance requirements, reliability, and account opening process. Top 10 NRE savings accounts include:

• Axis Bank
• State Bank of India
• ICICI Bank
• HDFC Bank
• Yes Bank
• Kotak Mahindra Bank
• Bank of Baroda
• RBL Bank
• Citibank
• SBM

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