When your status changes to a Non-resident Indian (NRI), there is a distinct shift in your ties to your homeland, particularly those of a financial nature. According to guidelines laid down by the Reserve Bank of India (RBI), NRIs must close or convert their resident savings accounts to NRE (Non-Resident External) or NRO (Non-Resident Ordinary) accounts. Both accounts offer distinct features tailored to the unique cross-border financial needs of NRIs.
With the right bank account, you can deposit and utilise your savings and repatriate funds while ensuring compliance with Indian banking norms. In this article, we look at the differences between NRE and NRO accounts, paying close attention to their distinct features, tax implications, and purposes.
What is an NRE Account?
A Non-Resident External (NRE) account is meant for NRIs to park their foreign earnings in India. The funds in this account are maintained in Indian Rupees. A key feature of an NRE account is that the funds, both the principal and the interest earned, are freely repatriable. Additionally, the interest earned is exempt from tax in India.
What is an NRO Account?
In contrast, the Non-Resident Ordinary (NRO) account is meant for NRIs to manage their income earned in India, like rent, dividends, or pension. The funds in this account are maintained in Indian Rupees. The interest earned on this account is fully repatriable after the payment of tax. The RBI allows for repatriation of up to USD 1 million every financial year for bona fide purposes such as education, medical expenses, employment, etc. An NRO account is suitable for NRIs looking to manage their rupee earnings conveniently while living abroad.
Differences and Similarities Between NRE and NRO Accounts
Parameter | NRE Account | NRO Account |
Suitability and Purpose | For NRIs who want to maintain their overseas earnings in Indian currency | For NRIs with income sources in India like rental income, dividends, or pensions received |
Deposits | Allows only foreign currency deposits. The funds are maintained in INR | Allows deposits in both foreign and Indian currencies. The funds are maintained in INR |
Withdrawals | Withdrawals can only be made in INR | Withdrawals can only be made in INR |
Taxation | The interest earned on the deposit is exempt from income tax in India. | The interest earned is subject to taxation at 30%, plus applicable surcharge and cess. On availing the Double Taxation Avoidance Agreement (DTAA) facility, the TDS rate applicable is in the range of 10-15% as per the country of residence based on the current DTAA agreement. |
Repatriability | Complete repatriability of principal and interest without any upper limit. | The interest earned on this account is fully repatriable after the payment of tax. The RBI allows for repatriation of up to USD 1 million every financial year for bona fide purposes such as education, medical expenses, employment, etc. |
Joint Account Holding Structure | It can be held jointly with another NRI/PIO or a resident Indian close relative on a former or survivor basis. | It can be held jointly with another NRI/PIO or a resident Indian close relative on a former or survivor basis. |
Final Words
While an NRE account is ideal for savings earned in a foreign currency, an NRO account helps deposit income earned in India. To experience seamless financial management as an NRI, you must understand the crucial differences between NRE and NRO accounts and choose either one or both in accordance with your needs. Lastly, pick a reputed and modern bank for a smooth NRI banking experience.