Are you an NRI looking to invest your hard-earned money in India? If yes, then you need to open a bank account that caters specifically to NRIs. But with so many options available, it can be confusing to choose the right one for you.
An NRE (Non-Residential External) account is meant for holding and managing foreign income in Indian rupees, while an NRO (Non-Residential Ordinary) account is designed for managing Indian income, such as rent or dividends, in Indian rupees.
NRE vs. NRO Account
| NRE Account | NRO Account |
|---|---|
| NRE (Non-Residential External) account is a type of bank account for Non-Resident Indians (NRIs) to hold and manage their foreign income in Indian rupees. | NRO (Non-Residential Ordinary) account is a bank account for NRIs to manage their Indian income, such as rent, dividends, or pension, in Indian rupees. |
| These accounts are funded with income earned outside India, such as salary from a foreign employer or investments made overseas. | These accounts are funded with income generated within India, including rent, dividends, or any other income earned in Indian rupees. |
| NRE funds accounts are freely repatriable, meaning they can be transferred back to foreign currency without any restrictions. | NRO funds accounts have limited repatriability, allowing only a certain amount per financial year to be repatriated to foreign currency after meeting specific conditions and obtaining necessary approvals. |
| Interest earned on these accounts is tax-free in India, and the principal and interest are not subject to wealth tax or income tax. | Interest earned on these accounts is taxable in India, and the principal and interest may be subject to income tax and wealth tax as per applicable laws. |
| NRE accounts are maintained in Indian rupees, and the funds are freely convertible into any foreign currency. | NRO accounts are also maintained in Indian rupees, but the funds are not freely convertible, and the conversion is subject to regulations and restrictions imposed by the Reserve Bank of India (RBI). |
| These accounts are primarily used for keeping foreign income, repatriation of funds, and making investments in India. | These accounts are used for managing income generated in India, paying bills, making local payments, and maintaining financial commitments within the country. |
| NRE accounts can be held jointly with another NRI, but not with an Indian resident. | NRO accounts can be held jointly with another NRI or an Indian resident. |
Introduction to NRE and NRO Accounts
NRE Accounts:
NRE accounts are designated specifically for Non-Resident(NRIs).
NRIs can open an NRE account while they are living outside of India.
All funds deposited into an NRE account must come from foreign sources.
Interest earned on an NRE account is exempt from taxes
The principal amount can be repatriated back to the account holder’s home country at any time without restrictions.
NRO Accounts:
- Resident Indians can open an NRO account even if they live outside of India.
- Funds deposited into an NRO account can come from both foreign and domestic sources.
- Interest earned on an NRO account is subject to taxes in India.
- The principal amount cannot be repatriated back to the account holder’s home country unless specific conditions are met.
Benefits of an NRE account
- An NRE account allows you to earn interest in foreign currency. This can be beneficial if the Indian rupee weakens against the foreign currency, as your interest earnings will be higher.
- An NRE account is a great way to save for your retirement. The interest earned on your account can be used to supplement your income during retirement.
- An NRE account can also be used as a savings account for your children’s education or for any other future goal. The money in the account can be easily transferred to another person’s bank account, making it a convenient way to save for specific goals.
- An NRE account is a tax-free savings vehicle. Interest earned on the account is not subject to taxes in India. This makes an NRE account an attractive option for those looking to minimize their tax liability
Benefits of an NRO account
- You can save money on taxes: Any money that you earn in India is subject to Indian taxes. However, if you have an NRO account, you can save money on taxes by transferring your foreign earnings into your NRO account. This way, you will only be taxed on the amount that is earned in India.
- You can maintain a good credit history: If you have an NRO account, it will help you maintain a good credit history. This is because any payments that you make from your NRO account will be reported to the credit bureau in India.
- You can use your NRO account to buy property in India: If you are a non-resident Indian, you can use your NRE or NRO account to buy property in India. You can also use the funds in your NRO account to pay for the maintenance of the property.
- Your family can access the funds in your NRO account: If something happens to you and you are not able to access your bank accounts, your family will still be able to access the funds in your NRO account.
Key differences between NRE and NRO accounts
- Residential Status: NRE (Non-Residential External) accounts are for non-resident Indians (NRIs) who earn income outside of India, while NRO (Non-Residential Ordinary) accounts are for NRIs who earn income in India.
- Repatriability: Funds in NRE accounts are freely repatriable, meaning they can be transferred back to the foreign currency of the account holder’s choice, while funds in NRO accounts have restrictions on repatriation.
- Income Source: NRE accounts are meant for holding and managing foreign income, while NRO accounts are designed for managing income earned in India, such as rent, dividends, or pensions.
- Taxation: Interest earned on NRE accounts is tax-free in India, while the interest on NRO accounts is subject to taxation as per the Indian income tax regulations.
- Currency: NRE accounts are maintained in Indian rupees, converted from foreign currency, while NRO accounts are maintained in Indian rupees.
- Purpose: NRE accounts are primarily used for savings, investments, and remittances, while NRO accounts are used for local expenses, payments, and holding income generated in India.
- Joint Accounts: NRE accounts can be held jointly with other NRIs, while NRO accounts can be held jointly with other NRIs as well as resident Indians.
- Repatriation of Principal Amount: Both NRE and NRO accounts allow repatriation of the principal amount, subject to certain regulations and documentation requirements.
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Conclusion
This article has highlighted the key differences between an NRE and NRO account, as well as their respective benefits. Both accounts are great options for people living abroad who want to manage their finances in India or send money home. While both offer advantages depending on your personal needs.
