Difference between NRE and NRO Account

If you are an NRI and are confused about choosing an NRO account or NRE account, it is paramount that you know the difference between the two and make an informed choice. Read on to know the differences. 

Non-resident Indians or NRIs who have earnings in India and overseas often have challenges with managing their finances. Sometimes, it can be difficult to keep track of the different bank accounts in foreign countries while repatriating money to your family members in India. 

Why do Indian banks offer NRE and NRO accounts?

As per the FEMA (Foreign Exchange Management Act) guidelines, an NRI cannot maintain a savings account in India. Suppose you have an existing resident Indian savings account. In that case, after you obtain NRI status, you must mandatorily convert it into either an NRO (Non-Resident Ordinary) account or NRE (Non-Resident External) account. Continuing to maintain a regular savings account meant for Indian citizens can attract a hefty fine. 

Opening an NRI account can help you in two ways. One, it enables you to remit your foreign earnings to your family members in India at any time you want. Two, you can manage your income in India and keep it secured in India itself. 

Before you look at the differences, let us first understand what an NRE account and NRO account is?

NRE Account

It is a Rupee-dominated savings account, which you can open as a savings account, current account, or term deposits such as fixed deposit or fixed deposit. This NRI account allows you to deposit your earnings in foreign currency, but the amount is converted into INR as per the prevailing exchange rate at the time of deposit. 

The account allows you to fully transfer the funds (both the principal amount and the interest earned) to your foreign account or an NRO account without any hassles or limitations. 

NRO Account

An NRO account can be opened as a savings account or current account to manage your income in India through rent, dividends from interest, etc. You can deposit the funds in Indian Rupees only, and you open an NRO account jointly with an Indian resident. One of the NRO account’s important features is that the interest earned from your deposits is subject to TDS (Tax Deducted at Source) in India. 

Difference between NRE and NRO Account

While both NRE and NRO accounts cater to the non-Indian residents’ banking needs, they differ in more than one way. Let us look at some important differences with the help you the following table:

 

  Non-Resident External Account Non-Resident Ordinary Account
Deposit Rules You can deposit only the amount earned overseas in the NRE account. The deposits can be made in foreign currency, but it is converted to INR at the time of deposit. The deposits can be made only in INR and the money must be earned in India through property income, dividends from investment, or other means.
Fund Transfer You can transfer the funds in your NRE account to another NRE account or NRO account You cannot transfer the funds from your NRO account to an NRE account.
Risk of Currency fluctuations NRE deposits are exposed to exchange rate fluctuation. When you deposit your foreign earnings in an NRE account, the actual deposit amount may vary due because the currency is converted into INR Since the deposits are accepted only in INR, there is no exchange rate fluctuation risk.
Reparability The deposit in your NRE account – both interest earned and the principal amount are fully repatriable. NRO accounts have restrictions on the repatriation of funds. You can repatriate a maximum of $ 1 million in a financial year.
Taxation The interest earned on deposits in the NRE account is exempted from tax The interest earned on deposits in the NRO account is subject to TDS

NRE Account or NRO Account – what to choose?

Both the NRE and NRO accounts serve different purposes. If you want to maintain the funds generated from income in India in Indian banks, it is better to choose an NRO account. But, if you want to convert your foreign earnings into savings and hold the amount in Indian currency, an NRE account would be suitable.