NRE & NRO Accounts - Meaning, Comparison, Benefits, Taxation

Managing finances between India and abroad can be challenging for Non-Resident Indians (NRIs). Indian banks offer two types of accounts — NRE (Non-Resident External) and NRO (Non-Resident Ordinary) — to make this easier. An NRE account helps manage foreign income with full tax exemption and free repatriation, while an NRO account manages income earned within India, subject to local taxes. 

This article explains the difference between NRE and NRO accounts, their features, benefits, and how to choose the right one for your financial needs.

Why do We have NRE & NRO Accounts?

As per the Foreign Exchange Management Act (FEMA) guidelines, an NRI cannot have a savings account in his or her name in India. You must convert all your savings (money earned abroad) to a Non-Resident External Account (NRE) or Non-Resident Ordinary (NRO) account. Therefore, continuing to use the savings account in the home country can attract hefty penalties. 

Opening an NRE or NRO account is, hence, a viable option for Non-Resident Indians. It can help NRIs in two ways. One, they can send their foreign earnings to India at any point. Two, they can also retain their income from India (via any assets) in the home country itself.

What is a Non-Resident Rupee (NRE) Account?

The NRE account is an Indian rupee-denominated account, offering complete security. These accounts can be in the form of savings, current, recurring, or fixed deposits. The foreign currency you deposit into the account is converted to INR. You can also transfer your funds (Principal & Interest amount) to a foreign account from an NRE account without any complications and restrictions. You need to note that the amount you deposit into these accounts must be earned outside India. 

The international debit card enables you to transact and withdraw money 24*7. Also, mutual fund investments to become effortless and instant if you link your NRE account number to the investment account. NRE account is primarily used for carrying out business, personal banking and making investments in India.

What is a Non-Resident Ordinary Rupee (NRO) Account?

An NRO account is a savings or current account held by NRIs in India to manage their income earned in India. Account-holders can deposit and manage their accumulated rupee funds without any hassle. The account allows you to receive funds in Indian or Foreign currency. You can apply for an NRO account jointly with a resident Indian or even an NRI. It is even feasible to transfer money from your current NRE account. However, the interest you earn in this account is subject to Tax Deducted at Source (TDS).

How to choose between NRE & NRO Account?

You can use the following table to understand the features of NRE and NRO accounts and decide which account suits your financial needs:

Difference between NRE Account NRO Account?

Repatriation

NRO accounts have limited access for repatriation. An NRO account restricts you from remitting more than USD 1 million inclusive of taxes during an assessment year. You can repatriate the interest amount freely, but the principal amount can be repatriated only within set limits. It also requires an undertaking along with a certificate from a Chartered Accountant. However, repatriation is free for NRE account holders for both the principal and the interest amount.

Tax treatment

An NRE account is tax-free (no income tax, wealth tax, or gift tax) in India. On the other hand, the interest earned in NRO accounts and credit balances is subject to respective income tax bracket. They are also subject to applicable wealth and gift tax. You can avail the reduced tax benefit under the Double Taxation Avoidance Agreement (DTAA).

Joint account holding

You can have a joint NRE account only if both the parties are NRIs. On the other hand, you can open an NRO account with another NRI or a resident Indian (a close relative) as mentioned under Section 6 of the Companies Act 1956.

How is NRE Account similar to NRO Account?

Both NRE and NRO accounts are Indian rupee-denominated accounts. They can be opened as savings or current accounts, depending on your needs. In both accounts, you are required to maintain an average monthly balance of ₹75,000.

Additionally, both account types allow NRIs to manage their finances in India securely and provide easy access to banking services like deposits, withdrawals, internet banking, and fund transfers within India.

Choosing between an NRE and NRO account depends on your source of income, taxation requirements, and repatriation needs. By understanding the difference between NRE and NRO accounts, NRIs can select the right option to manage their finances effectively and comply with RBI regulations.