NRE vs NRO: Which one should you choose?

Managing finances across borders can be both rewarding and complex. For Non-Resident Indians (NRIs), maintaining a connection with their home country while living abroad often involves holding bank accounts in India. Two popular options available for NRIs are the Non-Residential External (NRE) account and the Non-Residential Ordinary (NRO) account. In this article, we’ll delve into the distinction between NRE vs NRO Accounts, exploring its features, benefits, and Difference between NRE vs NRO Accounts from each other.

Before we move on to discuss about the distinction between NRE vs NRO, let us understand each one of them separately, including their distinctions, benefits and feature.

What is NRE Account?

The Non-Residential External (NRE) bank account is a type of bank account in India that allows Non-Resident Indians (NRIs) to hold and manage their foreign income in Indian currency (INR). These accounts are specifically designed to facilitate the seamless transfer of funds from abroad to India and to provide NRIs with a means to manage their Indian financial commitments. NRE accounts are maintained in INR and are freely repatriable, which means that the principal amount, as well as the interest earned, can be transferred abroad without any restrictions.

Also Read our Article on: What Is Non-Resident External (NRE) Account for Indian Seafarers?

What is NRO Account?

The Non-Residential Ordinary (NRO) Account is a type of bank account specifically designed for NRIs. It allows them to manage their income earned in India, including rent, dividends, pension, and other investments. This account can hold both Indian and foreign currency, making it a versatile tool for NRIs to manage their finances.

Why is opening an NRE or NRO account crucial for NRIs?

A Non-Resident Indian (NRI) is prohibited by RBI Regulations from opening and operating a conventional resident Savings Account. In addition, any account must be changed into an NRI Account by the bank prior to obtaining NRI status. To conduct any banking transactions in India, an NRI must open a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account. The NRI/PIO may choose to open either an NRE or NRO Account, or perhaps both, based on their transactional needs.

Key Features and Benefits of NRE Accounts and NRO Accounts

The following are the features and benefits of NRE Accounts and NRO Accounts:

• Key Features and benefits of NRE Accounts: The following are the key feature of NRE Account:

• Repatriation: The most significant advantage of an NRE account is the ease of repatriation. NRIs can freely transfer both the principal amount and the interest earned in the NRE account to their foreign bank accounts.

• Tax Benefits: NRE accounts offer tax benefits in India. The interest earned in these accounts is not subject to Income Tax Act, 1961, making them a favorable option for NRIs seeking tax-efficient savings.

• Rupee Denominated: NRE accounts are maintained in INR. This allows NRIs to invest in Indian assets, such as fixed deposits, stocks, and mutual funds, using funds from their NRE accounts.

• Ease of Operation: NRE accounts can be easily operated remotely through online banking facilities, allowing NRIs to manage their finances conveniently from abroad.

• Joint Accounts: NRIs can open joint NRE accounts with other NRIs. This can be useful for managing shared financial goals, such as family expenses or investments.

• Key Features and benefits of NRO Accounts: The following are the key feature of NRO Account:

• Income Sources: NRIs can use the NRO account to receive income generated in India, such as rent from properties, dividends from investments, and pensions. This makes it a convenient option for those who have ongoing financial commitments in India.

• Dual Currency: One of the standout features of the NRO account is that it can hold both Indian Rupees (INR) and foreign currency. This facilitates the management of funds received from both domestic and international sources.

• Tax Implications: Income earned in India and deposited into an NRO account is subject to income tax and should file an Income Tax Return Accordingly. However, an NRI can take advantage of the Double Taxation Avoidance Agreement (DTAA) to minimize the impact of double taxation on the same income in their home country.

• Repatriation of Funds: Unlike the NRE account, the NRO account has limitations on the repatriation (transfer) of funds. NRIs can repatriate up to $1 million USD per financial year, subject to certain conditions and documentation.

• Joint Account: NRIs can open an NRO account jointly with a resident Indian or another NRI. However, in the case of a joint account with a resident Indian, the interest earned is taxable.

Also read our Article on: Understanding Income Tax Regulations for Non-Resident Indians (NRIs) in India

NRO vs NRE: Difference between NRE vs NRO Accounts

While both NRE and NRO accounts serve NRIs’ financial needs, they cater to slightly different purposes. The NRE account primarily deals with foreign earnings that are freely repatriable (can be transferred back abroad without restrictions), while the NRO account handles income generated in India.

Here is some important Difference between NRE vs NRO Accounts:

NRE or NRO which is better?

The choice between an NRE and NRO account depends on your individual circumstances and financial objectives. If you are looking to repatriate your foreign earnings without any restrictions and enjoy tax-free interest income, an NRE account might be the better choice. On the other hand, if you have ongoing income sources within India and need a way to manage and repatriate a portion of it, an NRO account could be more suitable.

It’s important to note that some NRIs choose to have both NRE and NRO accounts, as they serve different purposes. This approach allows individuals to effectively manage both their foreign and Indian income streams.

Which one of NRE and NRO should you choose?

If you are an NRI, having an NRE vs NRO account is no longer a choice; it is a need. Nevertheless, based on your demands, you might have to choose between the two accounts. Since there are regulations governing revenue made both in India and abroad, choosing between the two is no longer a personal option but rather a straightforward technicality. If you have money from outside the country, you must open an NRE account; if you have revenue from India, you must maintain an NRO account.

Why not just open a regular savings account? You may have this uncertainty, and it is reasonable to be confused. As we’ve previously explained, it’s against the law for NRIs to have regular resident savings, fixed deposit, or recurring deposit accounts in banks. Depending on your demands, you must have an NRO, NRE, or both accounts.

The Bottom Line

Both NRE and NRO accounts serve specific purposes and offer distinct advantages. NRIs should evaluate their financial goals, income sources, and taxation preferences before choosing between NRE and NRO accounts. Ultimately, the decision between NRE vs NRO depends on your unique situation and long-term financial objectives.

Consulting a financial advisor can provide personalized insights and help make the most appropriate choice based on individual circumstances. You can connect with our Experts at Legal Window in case you need any understanding implications regarding NRE and NRO Bank Accounts.