Managing your income is important and requires knowledge and discipline. If you are a Non-Resident Indian (NRI), managing your earnings may be slightly more complicated. This is because you may have a domestic income like rent, dividends, pension, and much more in addition to your earnings in the country where you reside.
Considering dual incomes, banks offer special NRI accounts known as Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts. Both these accounts help in managing your foreign and domestic incomes.
Who is an NRI?
Before embarking on understanding the differences between NRE and NRO accounts, knowing the definition of an NRI will be helpful.
According to the Foreign Exchange Management Act (FEMA), an NRI is an Indian citizen residing in a foreign country. However, as per the Income Tax Act, 1961 if your stay in India during a financial year is less than 120 days, you are considered an NRI.
What is an NRE account?
Do you know what is an NRE account?
It is an Indian Rupee account, and the primary objective is to allow you to make deposits in international currencies. Along with you as the account holder, any person in India with access to the account can withdraw money from this type of account.
Such accounts are commonly used by NRIs to remit money to their family members in the country.
The international currency deposits are automatically converted to INR, which makes it easy to withdraw. This account can be used as a savings account to park your funds.
One of the biggest advantages is that the balance and any interest earned are tax-free.
You may also transfer your deposits in this account back to your international account if required. There are no limitations or charges for such transactions, ensuring the liquidity of your funds.
You may also use this account for business or for making Indian investments.
The two applicable restrictions on these accounts are as follows:
- Only NRIs are allowed to open an account and they will have to submit their visa or work permit to prove their status.
- All deposits into the account must be only via foreign earnings.
What is an NRO account?
NRO accounts are also rupee accounts and are offered to NRIs earning an income in India. You can deposit money either in INR or any foreign currency; however, withdrawals are allowed only in Indian Rupees.
The advantage of such accounts is that you can save your domestic income within the country. You may use the account either as savings or as a current account.
In addition to proving your NRI status, the following restrictions apply to these types of accounts.
- Liquidity is slightly restricted as fund repatriations are chargeable.
- You cannot transfer money from an NRO to an NRE account.
- The account balance and interest earnings on it are taxable.
Reasons to open NRE and NRO accounts
You may have an existing account; however, it will not be valid once your status changes to NRI. Here are five reasons why you must have an NRI savings account.
- Get access to remote and hassle-free operations and fund transfers from anywhere in the world with minimal documentation.
- Compared to several foreign countries, the Indian savings rates are higher, allowing you to earn more interest on the balance held in your NRI savings account.
- The Reserve Bank of India (RBI) introduced the Fully Accessible Route (FAR), enabling NRIs to invest in the Indian debt and stock markets.
- NRI savings accounts allow smooth fund transfers both within the country and internationally; however, you must check the limitations before repatriating funds.
- Interest earned on the NRE bank and deposit accounts is tax-free, allowing you to earn a higher return.
How to open NRE and NRO accounts in India
Almost every major public and private bank offers these types of NRI accounts. Both these are rupee-denominated accounts and there are two ways in which you can open an NRE and NRO account, which are discussed below:
- Converting your existing bank account to one of these two types.
- Opening a new account if you do not have an existing account in your name.
Difference between NRE and NRO accounts
Although both these are similar, there are certain distinguishing factors when it comes to NRE vs. NRO accounts. Here are eight differences between these two types of accounts that will help you understand how they function.
Fund deposit currency options
This is one of the major differentiating factors between the two accounts. An NRO savings account allows deposits in international currencies as well as INR while an NRE savings account allows only foreign currency deposits.
NRE savings accounts allow you to transfer income from international sources to India. In comparison, NRO savings accounts are used to park your funds through domestic earnings like pension, rent, and dividends.
Repatriation means the inflow and outflow of funds to a foreign country. You can easily repatriate interest earned on the balance in your NRE savings account to your country of residence.
On the other hand, the RBI allows you to repatriate only up to $1 million per financial year from your NRO savings account. Additionally, there are no charges applicable when funds are repatriated via an NRE savings account.
However, you will have to pay the applicable charges when you repatriate funds through your NRO savings account.
One of the major differences between these two accounts is the tax implications. The money deposited in the NRE savings account along with interest earnings is exempt from all taxes, such as income tax, gift tax, and wealth tax.
This tax exemption is not available when you opt for an NRO savings account. The interest earned on the NRO savings account balance is taxable; however, you can reduce the tax liability under the Double Taxation Avoidance Agreement (DTAA).
You can open a single or a joint NRE savings account where both the holders are NRIs, however, the laws do not allow you to open a joint account with an Indian Resident.
You may open a joint NRO account either with another NRI or an Indian Resident.
NRE account holders can transfer funds to both NRE and NRO savings account. On the other hand, fund transfers are only allowed between two NRO savings accounts.
Deposit and withdrawals of funds
You can deposit funds only in foreign currencies in your NRE savings account.
However, funds can be deposited in both foreign and domestic currencies in your NRO account.
Exchange rate fluctuations
NRE savings accounts are affected by dual exchange rate fluctuations; first in the change in the domestic currency rate and second, the conversion loss. These fluctuations do not affect NRO savings accounts.
NRE or NRO account: How to choose the right NRI Account?
Having an NRI account is a regulatory requirement, and you may choose either an NRE or an NRO savings account. You can also have both of these accounts simultaneously.
The decision between one and the other depends on the type of income and understanding what is an NRE account and an NRO savings account is important.
If you hold no assets or earn any income in India and need an account only for fund withdrawals, an NRE savings account is advisable. If your income is through an international source, this account is beneficial as the interest earnings are exempt from tax.
On the other hand, if you have earnings in India or want to execute financial transactions domestically, an NRO savings account is recommended. You cannot avoid the tax liability since you earn both international and domestic income.
Most banks in India offer both these types of accounts and follow similar rules and regulations.
However, you should conduct research on customer support and service quality to choose the right bank for opening an account.
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