I wanted to find answer for this question ” What is difference between NRE and NRO account? ” when I was about to leave India first time. I was under big confusion what type of bank account (NRE or NRO account) I must have as an NRI. I know you also must be under the same dilemma if you’re leaving India. So let’s try to solve this.
When an Indian individual leaves the country for any purpose and decides to be out of India for indefinite period (indefinite here means an undecided period of stay), then the particular individual will be called as NRI.
When an NRI, a Non-Resident of India needs to remit money into any bank in India, he/she could go for two major types of accounts which are namely – NRE account and NRO account.
It is always essential for any NRI to know the difference between NRE and NRO account in order to have a better understanding of what he/she is about to operate. This helps to avoid the common investment mistake. It is to be noted the Government of India has accepted legally to have the NRIs to open and have an Indian Rupee account in India for the purpose of repatriating funds from their host/working country.
In addition, these accounts are essential for an NRI to keep their earnings in INR terms until they stay there. This post will help you in getting a deeper insight about the NRE and NRO accounts in India.
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What is an NRE Account?
This could be abbreviated as ‘Non-Resident External (NRE)’ account. An NRE account is an Indian Rupee denominated account. This would mean that the funds in an NRE account will be maintained in Indian Rupees. It can either be a savings, current or a fixed/term/recurring deposit account.
An NRE account could be opened and actively maintained by all the NRIs. Funds are fully repatriable and could be easily sent back from an NRE account to foreign bank account. This (Repatriability) means that the funds could be sent from NRE account to any other country outside India without any difficulty.
For NRE account from HDFC bank, check here
It is to be noted that an NRE account can also be held as a joint account provided that the other person in whose name the account is to be held is also an NRI.
Another feature of this type of account is that the interest on his/her deposits in any NRE account is not liable to any taxation in India.
The resident power of attorney holder(if applicable) can make payments on behalf of the particular NRI. You must always remember that a power of attorney(PoA) resident can’t be able to open an NRE account on behalf of an NRI.
The amount held in NRE account are unreservedly repatriable .You can’t deposit cash by any means other than as settlement from abroad or transfer/exchange from an alternate NRE account.
NRE accounts can be opened only by NRIs and not by resident Indians.
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Advantages of an NRE Account:
Some of the advantages of having an NRE account are:
- The income from interest on an NRE account is exempted from tax.
- The funds that are present in an NRE account are completely repatriable and these funds could be sent to any country outside India.
- Funds could be transferred from this account to an NRO account.
- Facilities of joint account will be available only with an NRI.
- Facilities of nomination will be available only with an NRI Indian.
Disadvantages of an NRE Account:
Few of the disadvantages with an NRE account are:
- Deposits cannot be made in Indian Rupees in an NRE account.
- The facilities of joint account are available only to Non-Resident Indians and not to any of the resident Indians.
IF interested in technical details check RBI notification for NRE/NRO account
What is an NRO account?
It could be abbreviated as ‘Non Resident Ordinary(NRO)’ rupee account. An NRO account might be opened in the form of rupee denomination and could be operated as current, savings, and recurring as well as fixed deposit accounts.
This account type might be held mutually by the Indian residents. You could transfer/move cash into an NRO account from any normal bank account. An NRO account can also be opened by a person of Indian origin as well as by overseas citizen of India.
Check details of ICICI Bank’s NRI accounts here
An NRO account can be considered as same as an ordinary bank account which could be
opened by an Indian who is about to travel abroad with an intention to become an NRI. Any NRI could open this type of account just by sending remittances from his/her own resident country or by the transfer of funds from other NRO account of himself/herself.
Originally, repatriation of funds from the NRO was not allowed. However, the terms have been updated now which allows the account holders to remit a maximum of a million US Dollars. An NRO account would offer you with the same facilities as that of an NRE account except that any of the repatriation that was done through an NRO account must be reported to Reserve Bank of India with prescribed forms.
And, it is to be noted that the interest that has been earned in any NRO account is not free from tax and would require the account holder to pay the taxes as per the respective income tax bracket.
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Advantages of an NRO Account:
Some of the advantages of holding an NRO Account are as follows:
- The interest that could be earned on an NRO account will be as high as determined by the banks with which you operate.
- The facilities of joint account are available with the Indian resident as well as with an NRI individual.
- The nomination facility is available with both NRI as well as resident Indians.
Disadvantages of an NRO Account:
Few of the disadvantages with an NRO account are:
- The funds that are being deposited in these accounts cannot be completely repatriated. With these accounts, the interest amount can be repatriated only after paying the taxes.
- The maximum amount can be repatriated only up to 1 million USD for every financial year. This feature of this account type is making the funds to be utilized for making only the local payments.
- The funds from this account could not be transferred to an NRE account.
- The interest that is being earned from an NRO account is not free from tax payments.
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Difference between NRE and NRO account
The basic difference between NRE and NRO account are as follows:
- Account Opening: An NRE account could be opened either individually or jointly with other NRI(s) without the requirement of any approval provided that the funds are being transferred in the form of freely convertible currency. In case of an NRO account, a joint account may be opened for rupee transactions without the need of any approval. However, a joint account could be opened by an NRI with the resident of India.
- Repatriation: An NRE account is uninhibitedly repatriable when compared with an NRO account which has limited repatriability. An NRO account will be permitted for remittance only up to 1 million USD net of taxes.
- Taxations: An NRE account is free from Taxes in India. Here again the premium earned in an NRO account and credit equalizations are liable with respect to income tax brackets. In addition, the interest earned will also be subjected to wealth and gift taxes.
- Depositing the INR funds generated in India: If an NRI is earning money that is originating in India, (for example, compensation, rent, profits and so forth), he/she is just permitted to store it in an NRO account. And, storage of such incomes will not be allowed with an NRE account.
- Joint Holding: An NRE account might be jointly held with an alternate NRI yet not with Indian resident. In contrast, an NRO account could be held with an NRI and additionally with Indian residents who are close relatives as defined by law under the Section 6 of the ‘Companies Act 1956’.
- Deposits and Withdrawals: In case of an NRE account, the deposits could be made only as foreign currencies while the withdrawals are permitted as Indian local currency. In case of an NRO account, deposits are possible both as Indian Rupees and foreign currencies while the withdrawals would be permitted as Indian Rupees.
- Fund Transfers: It is quite trickier when speaking about the fund transfers with these account types. You can be able to transfer the funds from an NRE account to an NRO account but the reverse is not permitted. Yes, you cannot transfer the funds from an NRO to an NRE account.
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Knowing about the Similarities:
There are few similarities between an NRE and an NRO account. Both these accounts could be opened either as Savings or Current account and are denominated as Indian Rupee accounts. Another similarity is that any NRI will be required to maintain an average balance of 75,000 INR per month in both these account types.
Should you open an NRE or NRO account?
You have now fair idea of difference between NRE and NRO account. So which option should you choose finally.
An NRE account should be chosen when
- You want to maintain overseas foreign currency earnings in Indian Rupees
- You plan to again repatriate (or transfer back) your money to another foreign country from India in future
- You want to maintain liquid cash in Indian Rupees
- Plan to have joint account with other NRI or nominate an NRI
An NRO account should be chosen when
- You want to save/maintain India based earning in India. For ex., your rents, dividends, interest from bonds,debentures etc.,
- You do not plan to take back the money you have in your account to another foreign country in future
- You want a resident Indian as joint holder or nominee
I hope that the difference between NRE and NRO account is pretty clear from the above points. It could be concluded that an NRE account is ideal for making investments in India by using the overseas earnings and want to stay longer outside India. An NRO account will be ideal for depositing income from Indian earnings and if you plan to return to India after few years.
What I learnt from my experience? Open both NRE and NRO account at the same time. You can prevent unnecessary paper work and use them as per circumstance/convenience.This is my personal opinion.
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