Personal Finance
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5 mins read
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May 27, 2021
NRE vs NRO Accounts: What's the Difference?
Your guide to understanding the banking options available to NRIs, the advantages they pose, and which account is best for you.
If you are a non-resident Indian (NRI) hoping to transact in India, there are two options available to you if you’re planning to open a bank account in the country.
The first, a Non-Resident External Rupee Account (NRE), allows you to send foreign earnings to India and the second, a Non-Resident Ordinary Rupee Account (NRO), allows you to deposit earnings from India.
Both accounts are rupee-denominated but depending on the source of your income as a NRI, you may need a NRE instead of a NRO, or vice versa (or perhaps, in some cases, even both).
What is a NRE Account?
A NRE account is used by NRIs to deposit foreign currency, which is then converted to the Indian Rupee (INR).
A NRE account can be in the form of
, current, recurring, or fixed deposits and the
earned is income
each quarter.
Note that the NRE account doesn’t provide any protection against currency fluctuations but depositors are able to fully repatriate any amount deposited in these accounts. Moreover, a NRE account can be used for both business and personal reasons in India. What is a NRO Account?
A NRO account is used by NRIs to deposit domestic earnings. Any income received, such as
,
, or a
must be deposited in a NRO account, as a NRE account could lead to a tax-free transfer of money.
Any interest earned from a NRO account is taxable at 30% and there is no free repatriation of funds. Any repatriation must be reported to the Reserve Bank of India (RBI) and, after paying the applicable taxes, you can send up to $1 million a year.
You can still deposit foreign currency into a NRO account, but you cannot withdraw in the foreign currency. Note that a minimum of Rs. 10,000 must be maintained in a NRO account on a daily basis.
NRE vs NRO: Which is Better?
Choosing between a NRE vs NRO account depends on your situation. If, for instance, you only have foreign income, the NRE account is the obvious choice. If you need to repatriate more than a million dollars a year, then the NRE would also be the better option for you.
Similarly, if you have Indian rupee income, or are concerned about
risk, the NRO account is the right option.
Ultimately, which account you go for depends on your specific situation and how you hope to use your INR-denominated funds.
Who is Eligible to Open NRE and NRO Accounts?
As mentioned, only NRIs are eligible to open NRE or NRO accounts. You must be classified as an NRI under the Foreign Exchange Management Act (FEMA) to open either of these accounts, which means you must be a resident outside India who is also a citizen of India.
Moreover, to be classified as an NRI under FEMA, a person must have left India for the purpose of business, vocation, or any other reason that indicates their intention to stay outside of the country for an uncertain period of time.
Are NRE and NRO Accounts Mandatory for NRIs?
While it is not mandatory to own either a NRE or a NRO account, if a NRI wishes to transact in India they must choose between these two accounts.
Once they become an NRI, they need to convert their prior resident bank account or savings accounts into a NRO account. If they don’t, they can face
.
Benefits of Opening a NRE or NRO Account
As a NRI and continued citizen of Indian, per FEMA regulations, the chances are high that you would want to continue to transact in India, whether that be through depositing income or
in
and Indian bonds or applying for loans.
As such, a NRE or NRO account would be essential. What’s more, though, tax-free interest earnings with a NRE, as well as repatriation benefits, should not be overlooked.
Both types of accounts, when used correctly, can be used to increase savings and transfer
to
without losing a lot of money to
and other
.
