Introduction
Globalization has become normal for these new worlds. Many Indian people are looking for opportunities in a foreign land. Indians are well known for working in many countries. And just after lockdown and COVID precautions, many Indians have moved to a foreign land. An estimate states that, around 1.3 crores of NRIs or People of Indian Origin. After moving to foreign lands for studies, we apply for jobs, work there, earn there and settle there. But the foreign earnings cannot be transacted back to Indian banks by normal saving accounts and neither can Indian earnings be transacted into foreign currency. For such reasons, there are special bank accounts like NRE (Non–Resident External) & NRO (Non–Resident Ordinary).
And managing foreign income is a crucial matter, and it must be dealt with utmost care and knowledge. It can even be like an NRI have two earnings one from India through mutual funds, pensions, equities, rents, etc., and the other from the country they are residing in. Having noted down such important points by the bank, they offer us a specialized deposit account which satisfies our need to earn in India as well as abroad.
Many public and private banks facilitate NRE and NRO accounts. And as per Foreign Exchange Management Act (FEMA), it is not allowed for NRI to have savings accounts in his/her name. And continuing this practice might even be charged with hefty penalties. Hence, having NRE and NRO accounts is the only viable option for NRI to keep saving safe. And having those accounts will help any NRI send money back to their hometown or use it back where he/she is residing.
NRE Account vs. NRO Account
As aforementioned, the NRE & NRO accounts are necessary for all NRIs. Both accounts operate in a somewhat similar way, but they also have a major difference. The choice of account depends totally on us by how we manage our money and whether our investment mode is repatriable or non-repatriable. While you are residing abroad you have to specify the method of investment.
If the investment is repatriable then NRI should opt for the NRE account, and if the investment is non-repatriable, NRI should opt for the NRO account. During redemption of investment, the tax is deducted at source if the investment is not tax-exempt. As per RBI, the NRI have to maintain transparency while investing in India.
The NRE and NRO make it convenient to track bank accounts in a different countries. Two categories are specifically designed for us to hold our earnings in India as well as abroad with easier compliance with tax law and FEMA Regulations.
Difference Between NRE Account and NRO Account in Tabular form
| Parameters | NRE Account | NRO Account |
| Acronym | Non- Resident External | Non- Resident Ordinary |
| Function | An account for NRI helps them transfer money they earn in a foreign land. |
An account of NRI helps them manage their money earned in India while they reside in a foreign land.
|
| Repatriabilty | Money is repatriable. |
The interest amount is repatriable within the set limits. And the principal amount is charged.
|
| Taxability | Interest earned is tax-free |
Interest earned is taxable.
|
|
Deposits & withdrawals
|
Can deposit any cash of foreign currency but Indian rupees deposition is not allowed. Can withdraw in Indian rupees or INR.
| Can deposit Indian rupees as well as foreign currency. Can withdraw in Indian rupees or INR |
| Rate of Interest | Comparatively low. | High. |
| Account Holdings | Two NRIs can have a joint account. |
Two NRIs can have a joint account and even one Indian citizen and one NRI can have a joint account.
|
| Transfer of Fund | Money is transferable to NRE and NRO accounts. |
Money is transferable to an NRO account and not allowed to transfer to an NRE account.
|
| Rate fluctuation |
NRE account is affected by the exchange in INR to foreign currency and there is also conversion loss.
| NRO accounts are free from both i.e., conversion loss and rate fluctuation. |
What is NRE Account?
The Indians who reside in foreign lands feel free and convenient to park their earnings in the NRE account as savings. NRE saving accounts provide free repatriability even on the interest earned. (Repatriable: to send money from the country NRI reside to India and back again to a country they reside in). NRI can even invest in equity, debt mutual funds and also, due to free repatriability many of the traders and investors use NRE accounts. Such trading and investments are provided by Portfolio Investment Scheme (PIS) or NRI portfolio investment offered by financial institutions.
One major advantage the NRE saving account holds is that, it is free from all the taxes. Interest earned on funds in the account is also tax-exempt since all the earned income is from abroad. Income tax is also not applicable for gift tax and wealth tax of this account. But as per the 2020 Union budget if the global earning of NRI is not taxed liable anywhere else in the world, then it is taxable in India.
Only foreign earned money can deposit in the NRE saving accounts, deposition of INR is not allowed in NRE. These accounts are exposed to exchange loss, that is the conversion loss caused by daily fluctuation in INR to foreign currency (by the appreciation of domestic currency or depreciation of foreign currency). But the withdrawal of money has become easier with the international debit card. NRI have access 24*7 to withdraw money in case of need or emergency.
But transferability of the NRE account is quite simple. An NRI can easily transfer money from NRE-to-NRE account and even NRE to NRO account. And if NRI wishes to transfer interest money and principal money to a foreign bank account from an NRE account, it can be easily done without any restrictions. Even the NRI people who park their money in NRE FDs have a high return and can sustainable growth with zero risk and any fluctuation in the stock market is ineffective.
Two NRIs can have a joint NRE account. Such accounts are mostly used for personal banking, businesses, and making various investments in India while residing abroad. And even one NRI can have two NRE bank accounts.
What is an NRO Account?
Just like NRE, NRO is a saving account for the People of Indian Origin who resides in foreign lands, but both are different for a reason. So, all the terms of NRI and the Indian Government are fulfilled. The purpose of this account is to manage all the Indian income the NRI gets from rent, dividends, pension, etc while they are abroad. Along with that NRI can even transfer foreign currency to an NRO account which is converted into Indian Rupees or INR.
The transfer of money from NRO-to-NRO account is possible, even you can transfer to resident saving accounts, but not to NRE account. As a transfer from NRO to NRE is not possible. With an NRO account, it’s easy to invest in mutual funds and Indian bonds. Also, the interest rate on NRO Fixed Deposits is less than any of an unsecured loan.
NRO account falls back on some points like repatriation. Like Reserve Bank of India has set up some restrictions on repatriation. Only 1 million USD an NRI can take out from the NRO account in one financial year (April – March). Although, the interest amount is freely repatriated the principal amount is set for the limits mentioned above. It also requires an undertaking and a certificate from Chartered Accountant.
The NRO account is not tax exempted as most of the income earned is from the Indian source. So, they are liable to the Indian income tax department. They are also subject to applicable gift as well as wealth tax. Taxes are almost similar to those for resident accounts. And so, depending on the income tax bracket where the NRIs income falls, the rate could differ from 15 – 30 % and might go as high as 30.2%. However, the NRI can avail of DTAA (Dual Taxation Avoidance Agreement) and declare the income to their residing place and if India has DTAA you can claim relief from double taxation.
One thing that is good about NRO accounts compared to NRE accounts is that NRO accounts are not exposed to exchange rate fluctuation.
When the Indian person's status changes to NRI, he/she must transfer their regular saving accounts should be closed or converted into an NRO account. Failing to do so is breaking the law & guidelines given by FERA (Foreign Exchange Regulation Act). And this illegal act is liable to pay a penalty of up to three times the amount in the bank or two lakhs when the amount is not quantified (as per Section 13 of FEMA). Also, extra 5000 rupees on daily basis until the penalty is fully paid.
So, every Indian when their status is changed to NRI must check all the acts and regulations and take their steps to create an NRO account and close existing residence saving account.
Difference Between NRE Account and NRO Account in Points
- In the NRE account foreign currency can be deposited and withdrawn in Indian currency or INR. In the case of an NRO account, foreign currency, as well as Indian currency, is deposited and withdrawn in Indian currency.
- The repatriation in the NRE account is free, no charges are applied to repatriate money whether it be interest or principal amount, whereas in the NRO account charges are applied for the principal amount and interest money repatriation has some limits set up by RBI.
- The NRO account is not tax-free like the NRE account. In the NRE account, the tax is exempted for all amounts as well as gift and wealth tax is exempted. On the other hand, the NRO account is taxed and prone to income tax, wealth tax & gift tax. The tax rules for NRO account holders are the same as regular saving accounts of any Indian residence.
- Two NRIs can have an NRE joint account. Two NRIs and even one NRI and Indian residence can have an NRO joint account as per Section 6 of the Companies Act 1965. But the Indian residents must be family or close relatives.
- Transferability of funds of NRE is good as it can transfer to other NRE accounts as well as other NRO accounts. In the case of an NRO account, the transfer only takes place between different NRO accounts and the regular savings accounts of residents. An NRO cannot transfer funds to an NRE account.
- Effect of exchange rate fluctuation is a risk factor for NRE account holders as they are exposed to conversion loss and daily fluctuation in foreign currency to INR. NRO accounts are free from such risk.
- The NRE account's main purpose is to manage foreign earned income and convert it into INR and use the account for further investment. The NRO account is used to maintain the Indian earned income from rent, pension, equity, etc. It’s the same as regular saving accounts except foreign currency can be deposited and converted into INR.
- The rate of interest in the NRO account is comparatively high to the NRE account. Hence, one can invest in NRO or NRE fixed deposits more than any other unsecured loan.
Conclusion
Keeping in mind the difference which defining an NRE account and an NRO account, would help one to evaluate their requirements before jumping to a conclusion and choosing accounts. Because choosing the right account that fulfils one’s financial needs can make a world of a difference. Both NRE & NRO accounts are designed to meet all the financial needs of an NRI which will help them manage their funds even from across the globe with complete security.
The Indian Government also provides various benefits to NRI investors. The biggest NRI account investor benefits from India Infoline which is how one can open accounts online through video verification and various perks are made available to the NRIs. An NRI investor can have a rewarding journey in India, with a variety of investing tools being offered.
Both the NRE and NRO accounts have their difference and similarities but both serve a different purpose. One is good at transferability and repatriablity i.e., NRE and the other is used to maintain the Indian income source. So, any NRI who has an Indian income source must opt for an NRO account. But, if NRI just wants to convert foreign income into Indian currency he/she must choose an NRE account. Because it would be an ideal choice as NRE account deposits are tax-free with no restrictions on repatriation. 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 accounts is Rs 75,000.
References
- https://cleartax.in/s/nre-nro-accounts
- https://www.axisbank.com/progress-with-us/money-matters/save-invest/nre-or-nro-which-account-best-suits-your-need
- https://www.indiainfoline.com/knowledge-center/trading-account/difference-between-nre-and-nro-account
- https://www.bankbazaar.com/savings-account-guide/nre-savings-account-vs-nro-savings-account.html
- https://www.sc.com/in/stories/nr-imp-benefits-nre-nro-account/
