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An NRI (Non-Resident Indian) who earns income both abroad and in India often encounters difficulties in managing finances. They also face challenges in keeping track of bank accounts in a foreign country, and sending money to their home account can be tricky. NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts are the solutions to these problems.
Why do we have NRE and NRO accounts?
According to the Foreign Exchange Management Act (FEMA) guidelines, a Non-Resident Indian is not permitted to hold a regular savings account in their name in India. All funds earned abroad must be deposited into either a Non-Resident External (NRE) or Non-Resident Ordinary account. Continuing to use a standard savings account in India could result in significant penalties.
Opening an NRE or NRO account provides several benefits for NRIs. These accounts allow them to:
- Transfer Foreign Earnings to India: NRIs can easily send money from abroad to their Indian accounts whenever needed.
- Retain Indian Income in India: NRIs can keep their income generated from Indian assets (such as property, investments, etc.) in their home country through an NRO account.
Thus, NRE and NRO accounts offer a structured and legally compliant way for NRIs to manage their finances effectively, both for transferring and retaining income.
What is a NRE account?
A Non-Resident External (NRE) account is an Indian rupee-denominated account that provides complete security for funds. It can be opened in various forms such as savings, current, recurring, or fixed deposits. Funds deposited into an NRE account are converted from foreign currency to INR. One of the key features of an NRE account is the ability to transfer both the principal and interest to an international account without facing complications or restrictions.
It's important to note that only funds earned outside India can be deposited into an NRE account. The account also comes with an international debit card, allowing NRIs to transact and withdraw money 24/7. Furthermore, linking the NRE account to a mutual fund investment account makes it easy and instant to invest in mutual funds. Primarily, an NRE account is used for personal banking, business activities, and making investments in India.
What is a NRO account?
A Non-Resident Ordinary Rupee (NRO) account is a type of account that NRIs use to manage their income earned in India. It can be opened as a savings or current account. This account allows account holders to deposit and manage their rupee funds (both earned in India and abroad) with ease.
NRO accounts can be opened either individually or jointly with a resident Indian or another NRI. The funds can be received in either Indian or foreign currency. Transfers from an NRE account to an NRO account are also allowed. However, it's important to note that the interest earned in an NRO account is subject to Tax Deducted at Source (TDS) as per Indian tax laws.
In essence, an NRO account is designed to help NRIs manage income generated in India, such as rental income, dividends, or any other domestic earnings.
Key differences between NRE and NRO account
Both NRIs (Non-Resident Indians) and PIOs (Persons of Indian Origin) can open NRE and NRO accounts.
Basis | NRE Account | NRO Account |
Acronym | Non Resident External Account | Non Resident Ordinary Account |
Meaning | It is an account of an NRI to transfer foreign earnings to India | It is an account of an NRI to manage the income earned in India |
Joint Account | Can be opened by two NRIs | Can be opened by an NRI along with an Indian citizen or another NRI |
Deposits and Withdrawals | Only foreign currency deposits are allowed. Withdrawals are allowed only in Indian currency. | Can deposit in foreign as well as Indian currency and withdraw in Indian currency, subject to applicable TDS. |
Uses | Deposit or move foreign income with full flexibility to transfer it back to the originating country | Manage the income earned in India. |
Exchange Rate Risk | Prone to risk | Not prone to risk |
Taxability | Interest earned is tax free | Interest earned is taxable |
Documents Required
Passport Photo page and Address Page [Identity Proof]: Photocopy of the relevant pages of the passport where customer’s name, date of birth, date and place of issue, expiry date, photograph and signature of the applicant.
VISA (Non-Resident Status Proof) : Valid Visa / Work Permit / Residence Permit (card)
Overseas Address Proof/Communication Address Proof: Any one of the listed documents below :
- Address on Passport
- Utility bill, i.e. electricity bill, landline telephone bill, gas connection bill, water connection bill
- Overseas/Indian Bank Statement with at least two transactions initiated by the customer (Bank passbook will not be accepted)
- Rent receipt along with duly stamped/registered lease deed (wherever applicable). The lease deed should be valid as on date of account opening
- Letter from existing banker,- This letter should clearly specify that the mentioned address is your communication address and that your period of relationship with the bank is more than 3 months
- Residence permit (Government issued identity card)
- Driving license (only if issued by United States of America or the United Kingdom authorities)
If you want your communication address in India to be the same as it is in your passport then it’s alright. If not, then you can provide any one of the above-listed documents as Communication Address Proof in India.
Photograph (Passport Size)
PAN Card: In the absence of a PAN Card, you can also submit Form 60 for opening the bank account. If you want to invest in opportunities such as Mutual Funds or Shares, a PAN Card is mandatory. However, You can opt for a NRE/NRO FD and FCNR Deposits without a PAN Card.)
OCI Card (only needed for OCIs): In case of an OCI, OCI Card is also required in addition to the above mentioned documents.
Taxation
In terms of tax benefits, NRE Accounts offer a significant advantage. The interest income earned on NRE bank accounts and fixed deposits is exempt from tax in India. This makes NRE accounts an attractive option for NRIs who wish to earn interest on their foreign earnings without worrying about taxation in India.
On the other hand, NRO Accounts are subject to taxation on the interest income earned, and the tax will be deducted at source at applicable rates. However, Double Taxation Avoidance Agreements (DTAA) may help reduce the tax burden for NRIs, provided they submit the relevant documentation to the bank. The DTAA benefits are not automatically applied, so it's essential to submit the required documents to avail of these benefits.
While NRE Accounts provide tax exemptions and allow easy repatriation of funds (transferring funds from India to abroad), NRO Accounts are more suitable for those who need to deal with rupee transactions within India, such as receiving rental income or income from other domestic sources. The choice between the two accounts depends on your specific financial needs and transaction requirements.
Conclusion
There is no one-size-fits-all solution when it comes to choosing the right account. As an NRI, your decision should be based on your specific financial needs and income sources. NRE accounts are ideal for holding foreign income converted into Indian rupees, with no repatriation limit.
In contrast, NRO accounts allow you to manage both foreign and Indian income, but they come with a repatriation limit of USD 1 million per financial year. Ultimately, the choice depends on your individual transaction and repatriation requirements.
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