If you’re a Non-Resident Indian (NRI), you likely need specific bank accounts to manage income earned both in India and overseas.
This article dives into the differences between two common account types for NRIs: the NRE (Non-Resident External) account and the NRO (Non-Resident Ordinary) account. Choosing the right account is essential for managing your finances effectively.
We’ll explore key differences like repatriation options, currency considerations, and tax implications to help you decide which type of account — an NRO vs NRE account — best suits your individual needs.
NRE and NRO Accounts: What they are and who can open them
Both NRE and NRO accounts are used by Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs), but they serve different purposes and have different eligibility requirements.
What is an NRE Account?
An NRE (Non-Resident External) account is for NRIs who want to deposit income they’ve earned outside of India. When you deposit foreign currency, the bank converts it to Indian Rupees (INR).
Only foreign currency from outside India can be deposited into an NRE account.
What is an NRO Account?
An NRO (Non-Resident Ordinary) account is for NRIs who need to manage income earned in India, such as rental income, dividends, or a pension.
Both foreign currency from outside India and rupee credits from within India are accepted in an NRO account.
Who can open these accounts?
Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) are eligible to open both NRE and NRO accounts.
Key Differences Between NRE and NRO Accounts
While both NRE and NRO accounts are designed for Non-Resident Indians (NRIs), they have some important differences to consider before deciding which type of account best suits your needs.
Repatriation: Bringing Funds Back Home
One of the biggest differences lies in how easily you can move your money back to your country of residence. NRE accounts offer a significant advantage here.
- NRE Accounts: You can freely repatriate both the principal (the original amount you deposited) and the interest earned. In other words, you can transfer the funds back without restrictions.
- NRO Accounts: Repatriation is limited, generally to the interest income. You may be able to repatriate the principal, but there’s usually a limit per financial year (for example, $1 million USD). Be sure to check the current regulations to know the specific limits.
Currency: Dealing with Foreign Exchange
The currency in which you deposit and hold funds also differs between the two account types.
- NRE Accounts: These accounts are funded with foreign currency. The bank converts that currency into Indian Rupees. This eliminates any currency risk if you plan to use the money in India, as the value is locked in once converted.
- NRO Accounts: These accounts can accept both foreign currency and Indian Rupees. If you deposit Rupees, there’s no currency conversion involved, which can be convenient if you already have funds in India.
Taxation: Understanding Tax Implications
Tax implications are a crucial factor to consider when choosing between NRE and NRO accounts.
- NRE Accounts: Interest earned on NRE accounts is generally tax-exempt in India. This is a major benefit for NRIs looking to save and invest in India without incurring Indian taxes on the interest.
- NRO Accounts: Interest earned on NRO accounts is taxable in India. The bank will deduct tax at source (TDS) on the interest you earn. However, Double Taxation Avoidance Agreements (DTAA) between India and your country of residence might apply, potentially reducing your tax burden. It’s always best to consult a tax professional for personalized advice.
Joint Accounts and Account Operations
Both NRE and NRO accounts offer options for joint ownership and convenient account management, which can be helpful for NRIs.
Joint Account Holders
NRE accounts can be held jointly with other Non-Resident Indians (NRIs) or Persons of Indian Origin (PIOs). Some banks may also let you open a joint account with a relative who lives in India, with rights of survivorship.
NRO accounts offer even more flexibility: you can hold them jointly with other NRIs, PIOs, or even Indian residents. This can be a convenient way for NRIs to manage their Indian income together with family members who live in India.
Account Operations
With both NRE and NRO accounts, you can often appoint someone to act on your behalf. This is called a mandate holder, and they can operate the account for you. This can be a real convenience if you aren’t always in India.
You can also grant someone Power of Attorney (POA) so they can manage the account for you.
Can you convert between NRE and NRO accounts?
Sometimes. It’s not always simple, though, so you’ll want to talk to your bank about the steps you need to take and what the consequences will be.
You might have to convert your accounts if your source of income changes. For example, if you’re an NRI who moves back to India permanently, you’ll probably need to change your NRE account to an NRO account or a regular resident account.
Before you start the conversion process, think about how it will affect your taxes and whether you’ll still be able to move money out of the country freely. A financial advisor can help you understand the impact on your financial plans.
Which account should I choose?
The best account for you depends on your financial needs. Here are some things to consider:
- What kinds of transactions will you make? An NRE account is best for depositing income from overseas and sending it back home. If you need to manage income you’ve earned in India, an NRO account is probably the better choice.
- Will you need to send money back home? If you want to be able to send money back without restrictions, you should probably use an NRE account.
- What are the tax implications? NRE accounts offer certain tax benefits, while NRO accounts are subject to Indian tax laws.
Frequently Asked Questions
Can I hold both NRE and NRO accounts?
Yes, you absolutely can! Many NRIs find it beneficial to have both an NRE and an NRO account to manage their finances effectively. An NRE account is perfect for parking your foreign earnings, while an NRO account is designed for income earned in India.
Which account is better: NRE or NRO?
There’s no “better” account in general; it depends on your specific needs. If you want to repatriate your foreign income easily and tax-free in India, the NRE account is the way to go. If you have income generated in India that you want to manage, the NRO account is more suitable.
Should I send money to NRE or NRO?
Typically, you’d send money earned outside India to your NRE account if you plan to repatriate it later. Money earned in India should be deposited into your NRO account. Think of it this way: NRE for foreign earnings, NRO for Indian earnings.
What are the disadvantages of an NRO account?
The main disadvantage of an NRO account is that the interest earned is taxable in India, according to the applicable income tax slab. Also, while you can repatriate funds from an NRO account, there are limits and it’s subject to taxes and certain regulations that don’t apply to NRE accounts. Plus, there are some reporting requirements.
In Summary
NRE and NRO accounts both help NRIs manage their finances in India, but they differ in important ways. Remember the key distinctions: repatriation, currency, and taxation. Understanding these differences is essential for sound financial planning.
The best choice between an NRE and NRO account depends on your individual needs and circumstances. If you’re an NRI, consider consulting with a financial advisor or tax professional to make sure you’re making the best decisions about your money.
NRE and NRO accounts can play a key role in helping NRIs make financial transactions in India, so it’s worthwhile to learn the ins and outs of these accounts.