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

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An NRI (Non-Resident Indian) with earnings both abroad and in India often faces difficulties in managing his/her finances. They also find it difficult to track bank accounts in a different country, and also when trying to repatriate money to their home account. NRE & NRO accounts help with this.

Wondering how? Read on to find more about this.

In the article, we will cover the following topics.

1. Why do we have NRE & NRO Accounts?

As per the Foreign Exchange Management Act (FEMA) guidelines, it is illegal for NRIs to have saving accounts in their name in India. It is mandatory that you convert all your savings (money earned abroad) to a Non-Resident Rupee (NRE)/Non-Resident Ordinary Ruppe (NRO). 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 the money they earn abroad to India at any point of time. Two, they can also retain their income from India (via any assets) in the home country itself.

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

The NRE account is an Indian Rupee denominated account, which offers complete security. They can be in the form of savings, current, recurring, or fixed deposits. The foreign currency you deposit into the account is converted to INR. This will allow you to repatriate the money in the account (plus interest earned) any time. Also, the interest is non-taxable.

Transferring money from the resident country to India attracts no charges, and you can earn higher interest too. The international debit card enables you to transact and withdraw money 24*7. Also, mutual fund investments too become effortless and instant, if you link your NRE account number to the investment account.

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

An NRO account, on the other hand, is a savings or current account held in India for the NRIs to manage their income earned in India. Account-holders can deposit and manage their accumulated rupee funds without any hassle. Once you deposit the money to the NRO account, the foreign currency is automatically converted to INR.

You can apply for an NRO account jointly with a resident Indian in which the bank will give you both an NRO debit card each. 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).

4. How to choose between an NRE & NRO Account?

NRE,NRO account

5. How is an NRE Account different from NRO Account?

a. Repatriation

NRO account has limited access for repatriation. An NRO account restricts you from remitting more than USD 1 million inclusive of taxes during an assessment year. 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 component.

b. Deposit of Rupee Funds generated in India

If an NRI/PIO/OCI is earning a salary, rent, dividends, etc. in India, he/she is required to deposit such incomes only in NRO accounts.

c. 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 account and credit balances is subject to respective income tax bracket. They are also subject to applicable wealth and gift tax.

d. 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.

e. Flow of funds

Unlike an NRO account, you can repatriate the money outside India in any currency for an NRE account.

6. How is an NRE Account similar to NRO Account?

Both NRE and NRO accounts are Indian Rupee accounts. You can open them as savings as well as current accounts. Also, the average monthly balance you must maintain for both the account is Rs 75,000.

Based on your financial goals and requirements, you can choose either of the account types. These accounts are investment-friendly, which allows you to make investments from abroad. If you are confused about which fund to choose, ClearTax Save has handpicked investments that cater to diverse investors. Start investing and let the fruits of your hard work grow.