NRE vs NRO Accounts

What is an NRO Account?

An NRO Savings Account opened in India serves the purpose of allowing NRIs to manage their income earned in India from sources like rent, pension, dividends, etc., while they are abroad. NRO account holders can also transfer foreign currency into an NRO account, which will be converted to Indian Rupees or INR. It is important to know that an NRO Account is not exempt from tax laws. Though it may only be opened by NRIs, an individual may also convert their existing resident savings account to an NRO account, when their residential status changes. So, a when I resident becomes an NRI, they have the option of converting their existing savings account held with a certain bank in India to an NRO account.

Distinguishing Factors Between NRE Account & NRO Accounts:

Both NRE and NRO Savings Accounts, though similar in many aspects, do have some major differences. In order to better understand the function and working of both these accounts, here is a low down about some major factors which distinguish an NRE Account from an NRO Account.

1. Currency Option for Fund Deposit

One of the major differences between an NRE and NRO Savings Account is the option each of them offer for deposit of funds. An NRE Savings Account will only allow you to deposit funds in a foreign currency while in an NRO Savings Account, you can also deposit funds in Indian Rupees.

1. Purpose

An NRE Savings Account basically serves the purpose of allowing you to transfer funds earned abroad to India and maintain them. An NRO Savings Account on the other hand serves the purpose of allowing you to accumulate and maintain the regular flow of income you may be earning in India by way of rent, dividends, pension, etc.

1. Repatriation of Funds

In simpler terms, repatriation means the inflow or outflow of currency to a foreign country. In this regard, NRE and NRO Savings account differ to some extent. One can conveniently repatriate funds, including the interest earned, from an NRE Savings Account. However, the RBI has imposed certain restrictions regarding repatriation from NRO Accounts. NRO Savings Account holders may only be allowed to remit up to USD 1 million during one financial year i.e., April to March.

1. Interest Rates

It is likely that interest rates offered on NRE and NRO Accounts may differ with different banks offering that facility. However, currently, most banks are offering rather similar rates of interest on both these accounts.

1. Tax Imposition

One of the major differences between NRE and NRO Savings Accounts could be the taxation laws which are applicable on each. NRE accounts are exempted from tax. Not only is the income but also the interest earned on these accounts is tax exempted. Hence, taxes like income tax, wealth tax, gift tax, etc., are not applicable in India.

However, following the Indian Income Tax Laws, NRO Accounts are not exempt from tax. Taxes like income tax, wealth tax, gift tax, etc., are applicable to NRO Accounts. Also, interest earned on an NRO Account is taxable as well. NRO Account holders, do, however, have the reduced tax benefit which they may avail under the Double Taxation Avoidance Agreement (DTAA).

1. Account Holding

An NRE Joint Account or an NRO Joint can be opened by two NRIs. However, an NRE Joint Account cannot be opened by an NRI along with a resident Indian. This is only allowed in the case of a joint NRO Account.

1. Exchange Rate Fluctuation

Exchange rates can result in considerable loss of currency. Keeping that in mind, NRE accounts are open to two kinds of loss due to exchange rates which are, daily fluctuations in the value of the rupee or INR, as well as conversion loss. However, NRO Accounts are safe from both these exchange rate fluctuations. 

1. Fund Transfer

When opening an account, one of the primary concerns one may have been are regarding transfer of funds, may it be to a family, friend or for any work-related purpose. As an NRE Account holder, you can transfer money not only to another NRO account but to n NRO account as well. However, as an NRO account holder, you may only transfer money to another NRO account. You cannot transfer money to an NRE account from an NRO account.

1. Deposit / Withdrawal of Funds

Deposit or withdrawal of funds is also one of the more important factors differentiating an NRE Account from an NRO Account. Funds originating from a foreign country (foreign currency) can be deposited in both NRE and NRO accounts. However, funds originating in India i.e. in Indian Rupees or INR can be deposited only in NRO Accounts and not an NRE Account. Withdrawals, however, can only be made in Indian Rupees or INR from both NRE and NRO Accounts.

Choosing the right account which best addresses one’s financial needs can make a world of a difference. Keeping in mind the differences which define an NRE Account from an NRO account, it would help if you can evaluate your requirements before choosing between any of these two accounts. However, since both these accounts have been designed after giving due consideration of an NRIs financial needs, they will undoubtedly offer a convenient and secure solution to help manage funds from across the globe.

How to choose between an NRE & NRO Account?

NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts are two types of bank accounts that are designed for Non-Resident Indians (NRIs) to manage their earnings in India. 

An NRE account is for NRIs who want to hold overseas earnings in Indian currency. It is fully repatriable, allowing transfers to foreign accounts without restrictions, and offers high liquidity for easy withdrawals and deposits. Interest earned is tax-free in India. NRIs can open it singly or jointly with another NRI, related or unrelated.

An NRO account is for NRIs to save earnings from India, such as rent, dividends, or property sale proceeds, in Indian currency. It is partially repatriable, with limited transfers abroad per year, and interest earned is taxable in India. It offers high liquidity and can be opened singly or jointly with a resident Indian who is a close relative (spouse, parent, sibling, child, grandparent, grandchild).

In summary, NRIs should opt for NRE accounts if they want to hold or maintain their overseas earnings in Indian currency and NRO accounts if they want to save their earnings from India in Indian currency itself. Both accounts provide high liquidity, allowing easy withdrawals and deposits. 

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