NRE vs NRO Account: Difference, Features, Eligibility

Planning to travel abroad for a job, or are you an NRI? Well, then, you must complete all your banking tasks in India on time. Whether managing your investments or locker facility, you must ensure that everything is streamlined.

But more than that, you must ensure your savings or current account is closed. You must be wondering why. Well, the reason is that you would need a new account, which is the NRE NRO account in this situation.

These accounts are used to manage your income arising from abroad and within the country. An NRE account is to deposit income earned from abroad. An NRO account is used to deposit income arising within the country. But there is more to it.

So, let us start with who NRI is and move ahead to what is NRE and NRO accounts and explore the NRE vs NRO accounts in detail here.

Who is an NRI?

NRIs are defined under the Foreign Exchange Management Act (FEMA) and the Income Tax Act (ITA) as follows:

1. NRI as per FEMA

According to FEMA, an NRI is a "person resident outside India" who is either a citizen of India or a Person of Indian Origin (PIO) who is not a "person resident in India." This classification focuses on the individual's intention to reside outside India for employment, business, or other indefinite reasons.

2. NRI as per ITA

According to the Income Tax Act of 1961, an individual's residential status in India is determined based on their physical presence during a financial year (April 1st to March 31st). To be considered a resident and not an NRI, an individual must meet either of the following conditions:

• If an individual is in India for a period of 182 days, or more during the financial year for which you are filing the tax or

• If he/she is in India for a period of 60 days or more during the financial year (the year for which you are filing the tax) and 365 days or more during the 4 years immediately preceding the financial year.

If neither condition is satisfied, the individual is classified as a Non-Resident Indian (NRI) for that financial year.

Understanding your NRI status is crucial before deciding on account types like NRE or NRO you need.

Understanding NRE Account

An NRE (Non-Resident External) account is a type of bank account specifically designed for Non-Resident Indians (NRIs) to manage their income earned outside India. This account allows NRIs to deposit foreign currency converted into Indian Rupees (INR) at the time of deposit.

The primary purpose of an NRE account is to facilitate easy repatriation of funds back to the country of residence, while also providing tax benefits. NRE accounts can be held as savings, current, recurring, or fixed deposit accounts and can only be opened in the name of NRIs, either individually or jointly with other NRIs.

Overall, NRE accounts are a vital financial tool for NRIs looking to maintain their savings in India while enjoying the flexibility of managing their foreign earnings.

Features of NRE Account

Before exploring the NRE vs NRO account, knowing the features of each is important. So, here are the primary features of the NRE account that you must know:

• Designed for NRIs to deposit foreign earnings in India.

• Deposits made in foreign currency, converted to Indian Rupees (INR).

• Available as savings, current, term deposit, special term deposit, or recurring deposit accounts.

• It can be opened individually or jointly with other NRIs.

• This account must be funded by remittances from outside India or transfers from other NRE, NRO, or FCNR (B) accounts.

• Full repatriation of principal and interest is allowed.

• Interest earned is exempt from Indian income tax.

• The principal amount is also tax-exempt.

• It can be used for personal purposes, business activities, or investments in India.

• Funds can be withdrawn for local payments in Rupees.

• May include debit card, SMS alerts, cheque book, and Internet banking facilities.

• Rupee loans are available against NRE deposits.

• Term deposits associated with NRE accounts have a minimum period of 1 year and a maximum of 10 years.

• Subject to exchange rate fluctuations.

• Allows transfers from NRE accounts and NRO accounts.

Eligibility and Documents for NRE Account

Opening an NRE account requires passing through a certain set of eligibility criteria. These are:

• Must be a Non-Resident Indian (NRI), meaning an Indian citizen residing outside India.

• Persons of Indian Origin (PIO) are eligible.

• Overseas Citizens of India (OCI) are eligible.

• Individuals who once held an Indian passport are eligible.

• Those whose parents or grandparents were Indian citizens at the time of the Indian Constitution or under the Indian Citizenship Act of 1955 are eligible.

• Spouses of Indian citizens or PIOs are eligible.

• Pakistani nationals require prior approval from the Reserve Bank of India (RBI).

• Bangladeshi nationals need a valid visa and residential permit.

Now, the additional documents that you would need to submit are as follows:

Benefits of NRE Account

When you are planning to open an NRE account, it is important to know the benefits that you will get. Now that you know the eligibility needs, here are the main benefits you will get.

1. Tax-Exempt Interest

One of the most significant advantages of an NRE account is that the interest earned is completely exempt from Indian income tax. This means that as an NRI, all returns on your savings are free from tax deductions, allowing you to maximize your earnings.

2. Full Repatriation of Funds

NRE accounts allow for the complete repatriation of the principal amount and the interest earned. This means you can transfer your funds back to your country of residence without any restrictions or limits, giving you flexibility in managing your finances across borders.

3. Simplified Currency Conversion

When you deposit foreign currency into your NRE account, it is automatically converted into Indian Rupees (INR) at the prevailing exchange rate. This eliminates the hassle of dealing with currency conversion separately and ensures you can easily manage your funds in India.

4. Competitive Interest Rates

NRE accounts typically offer higher interest rates than regular savings accounts in India. This means your money can grow faster, making it a more attractive option for NRIs looking to earn better returns on their deposits.

5. Joint Account Facility

NRE accounts can be opened jointly with other NRIs or Persons of Indian Origin (PIOs). This feature is particularly useful for couples or family members who want to manage their finances while enjoying the benefits of an NRE account.

6. Diverse Investment Opportunities

Funds in an NRE account can be utilized for various investments in India, such as purchasing real estate, investing in mutual funds, or making fixed deposits. This flexibility allows NRIs to exploit the growing Indian market and diversify their investment portfolio.

7. Loan Options

NRE account holders can avail themselves of loans against deposits or even overdraft facilities, providing quick access to funds when needed. This feature is particularly useful for emergencies or unexpected expenses.

NRE accounts offer a comprehensive suite of benefits that cater specifically to the needs of NRIs. But before we explore the difference between NRE and NRO accounts, let us now find out about NRO accounts.

Understanding NRO Account

An NRO (Non-Resident Ordinary) account is a Rupee-denominated account in India. NRIs, PIOs, and OCIs open it. It helps to manage income earned within the country. This can be rental income, dividends, or even interest.

It can be a savings, current, or fixed deposit account. This is usually a joint account with Indian resident. While deposits can be made in foreign currency, the account remains INR.

The repatriation is limited and the amount earned here is taxable in India.

Features of NRO Account

With this, you now know about the NRE and NRO account. So, now let us explore the details of the NRO account here. Let's start with understanding its features here:

• Designed for NRIs to manage income earned in India.

• It is maintained in Indian Rupees (INR).

• Deposits accepted in both Indian and foreign currencies.

• Available as savings, fixed deposit, or current accounts.

• It can be held jointly with another NRI or a resident Indian relative.

• Allows fund transfers from NRE to NRO accounts (with remittance limits).

• Limited repatriation of funds, up to USD 1 million per financial year (subject to tax and documentation).

• Interest earned is taxable in India and subject to TDS.

• Offers facilities like SMS alerts and internet banking.

• Existing accounts can be converted to NRO accounts.

• Accepts deposits from other NRO/NRE accounts or from overseas.

Eligibility and Documents for NRO Account

NRO vs NRE difference is incomplete until you know the eligibility of both. So, here is the eligibility criteria for the NRO account:

• Must be a Non-Resident Indian (NRI), meaning an Indian citizen residing outside India.

• Persons of Indian Origin (PIO) are eligible.

• Overseas Citizens of India (OCI) are eligible.

• Individuals who once held an Indian passport are eligible.

• Those whose parents or grandparents were Indian citizens at the time of the Indian Constitution or under the Indian Citizenship Act of 1955 are eligible.

• Spouses of Indian citizens or PIOs are eligible.

• Pakistani nationals require prior approval from the Reserve Bank of India (RBI).

• Bangladeshi nationals need a valid visa and residential permit issued by the Foreigner Registration Office (FRO) / Foreigner Regional Registration Office (FRRO).

The documents that are required to open the NRO account are as follows:

Benefits of NRO Account

To understand the NRE and NRO account differences, knowing each account in detail is crucial. Everything from their features and eligibility to benefits is crucial. So, here are the key benefits of the NRO account:

1. Management of Indian Income

An NRO account is specifically designed for Non-Resident Indians (NRIs) to manage income earned in India, such as rent, dividends, and pensions. This allows NRIs to handle their domestic earnings without complex currency conversions efficiently.

2. Repatriation of Funds

After paying applicable taxes, NRIs can repatriate up to USD 1 million per financial year from their NRO accounts. This limit provides flexibility for NRIs who must transfer funds back to their country of residence while ensuring compliance with Indian regulations.

3. Loan Facilities

NRO account holders can avail of loans against their fixed deposits in the NRO account. These loans usually come with lower interest rates than unsecured ones since they are secured by the deposit amount, making it easier for NRIs to access funds during emergencies.

4. Joint Account Options

NRIs can open NRO accounts jointly with another NRI or a resident Indian relative. This feature benefits families or partners managing shared finances, allowing for seamless transactions and financial planning.

5. Currency Flexibility

While the NRO account is maintained in Indian Rupees (INR), it allows deposits in foreign currency. This feature simplifies the process for NRIs who wish to deposit funds from abroad while ensuring that withdrawals are made in INR.

6. Easy Fund Transfers

NRIs can easily transfer funds from their NRE (Non-Resident External) to NRO accounts, allowing for efficient management of finances across different accounts based on their needs and sources of income.

7. Accessibility and Convenience

Most banks offer online banking facilities for NRO accounts, enabling NRIs to manage their accounts from anywhere in the world. This includes checking balances, making transfers, and monitoring transactions conveniently.

Difference Between NRE and NRO

NRO and NRE accounts are both important for an NRI. But now is the time to understand the NRE and NRO differences to ensure that you use these accounts correctly. So, here are the details of the difference to know.

Conclusion

Choosing between an NRE and NRO account depends on your income source as an NRI. Hence, it is important to know the NRO and NRE difference.

An NRE account suits those earning abroad, offering tax-free status and easy fund repatriation. Conversely, an NRO account is ideal for managing income earned in India, such as rent, although this income is taxable and repatriation has limits. 

Carefully assess your financial situation and take the help of an expert who can guide you through the process easily. Understanding these differences is key to efficient financial management as an NRI. 

FAQs

Q. Can I open both NRE and NRO accounts?

Yes, NRIs can open both NRE and NRO accounts. This allows you to manage different types of income separately: foreign earnings in the NRE account and Indian income in the NRO account.

Q. Is the interest earned in an NRE account taxable in India?

No, the interest earned in an NRE account is tax-free in India, providing a significant advantage for NRIs looking to save and grow their foreign income without incurring Indian taxes.

Q. What happens to my NRO account if I become a resident Indian again?

If you return to India and become a resident, your NRO account will be converted into a resident savings account. The applicable rules and regulations for resident accounts will then apply.