Difference Between NRE & NRO Account: Which One Should You Choose?

Posted on Wednesday, August 25th, 2021 | By IndusInd Bank

When you move away from home, a lot of things change, including your financial life! A change of residential status also means a change in the nature of your bank account.

According to the Foreign Exchange Management Act (FEMA), a Non-Resident Indian (NRI) cannot hold a resident savings account in India. But thankfully, you can manage your finances with the help of an NRE or an NRO account. Choosing between an NRE and NRO account becomes easier when you understand what each account is used for. Both accounts have different rules for taxation, fund transfers and joint holding.

This guide explains the key differences between NRE and NRO accounts and helps you choose the account that suits your needs.

What is an NRE (Non-Resident External) Account?

An NRE or Non-Resident External account is an account in which the foreign earnings you deposit get converted into INR or Indian rupees. An important feature of an NRE account is that both the principal and the interest amount attract tax exemptions. Moreover, you are free to repatriate or transfer your savings to a foreign account without any restrictions.
However, do keep in mind that an NRE account is prone to exchange risk fluctuations. Meaning, even if you deposit your money, say, on 1st August 2021 and withdraw it in INR on 31st August 2021, chances are, you could be withdrawing more or less than the actual value of the initial principal. NRE accounts do not protect against currency fluctuations that may change on a daily basis.

What is an NRO (Non-Resident Ordinary) Account?

An NRO or Non-Resident Ordinary account, on the other hand, allows you to receive your funds earned in India. However, you can only withdraw in Indian rupees. Plus, the up to USD 1 million kept in NRO account is repatriable per financial year or transferred into a foreign account. Meaning, the RBI has set a limit on the transfer of principal and interest amount – $1 million for one financial year after deduction of applicable taxes. Also, the interest you earn on an NRO account is subject to 30% TDS, or Tax Deducted at Source along with education cess.

NRE vs NRO Account: Key Differences

Purpose & Motive

An NRE account is useful when you want to transfer your overseas salary, savings or other foreign income to India. It helps you keep these funds separate and access them whenever you need them in India.

An NRO account is useful when you receive money in India. For example, if you earn rental income or receive a pension here, you can credit that income to your NRO account.

If you earn money both outside India and in India, maintaining both accounts helps you manage the two sources separately.

Taxation

Interest earned on an NRE account is exempt from Indian income tax for eligible NRIs. This means the interest earned on the account is not taxed in India.

Interest earned on an NRO account is taxable in India. The bank deducts TDS from the interest.

Therefore, an NRE account offers a tax advantage in India, while an NRO account is suitable for managing income earned in India even though the interest is taxable.

Repatriation of Funds

Repatriation means sending money from India to your country of residence.

The principal amount and interest earned on an NRE account are repatriable as per applicable rules. You can transfer these funds abroad through regular banking channels.

Funds in an NRO account have stricter repatriation rules. Current income can be sent abroad, while other eligible balances can be repatriated up to USD 1 million in a financial year. The transfer requires tax compliance and supporting documents.

Joint Account Rules

An NRE account can be held jointly with another NRI or PIO. It can also be held jointly with a resident relative on a “former or survivor” basis, subject to applicable rules.

An NRO account can be held jointly with another NRI, PIO or resident Indian on a “former or survivor” basis.

Before opening a joint account, check the relationship between the account holders and the operating instructions allowed by the bank.

Choosing the Right NRI Account

If you want to open a bank account to secure your overseas earnings in Indian currency without facing any tax liabilities, you should consider opening an NRE account. However, if you want to open an account to park your income earned in India, such as rent or pension, the ideal option is an NRO account.

Can You Hold Both NRE and NRO Accounts?

Yes, an NRI can hold both NRE and NRO accounts.

You can use the NRE account for your overseas salary, savings and other foreign income. The NRO account can be used for rental income, pension, and other income received in India.

Maintaining both accounts keeps your overseas earnings and India-based income separate. It also makes it easier to track your expenses, savings and fund transfers.

Making the Right NRE or NRO Account Choice

An NRE account is the better fit for managing overseas earnings, especially when you want to keep the money in India and retain the option to send it abroad.

An NRO account is the right choice for managing income earned in India and paying for expenses or financial commitments within the country.

If you have income from both sources, holding both accounts gives you greater control over your finances. Compare the account features, tax treatment, repatriation rules and charges before making your decision.

Frequently Asked Questions

Q1. Can I transfer money from an NRO account to an NRE account?

Yes. You can transfer eligible funds from an NRO account to an NRE account within the overall limit of USD 1 million in a financial year. The transfer requires completion of applicable tax formalities and submission of the documents requested by the bank.

Q2. Can I open a joint NRE account with a resident Indian?

Yes, but only in specific cases. An NRE account can be held jointly with a resident relative on a “former or survivor” basis. The resident relative can operate the account as a Power of Attorney holder during the lifetime of the NRI account holder.

Q3. Which account is better for tax savings, NRE or NRO?

An NRE account is better for tax savings in India because interest earned is exempted from income tax for eligible NRIs.

Interest earned on an NRO account is taxable in India and TDS applies. However, your choice should also depend on the source of your income.