NRE and NRO Accounts: What They Are and Why NRIs Need Them | EXPLAINED

NRE and NRO Accounts: For Non-Resident Indians (NRIs), managing finances across borders can be a complex process. Balancing income earned abroad with funds generated in India requires specialised banking solutions.

This is where NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts come into play.

Indian banking laws, governed by the Foreign Exchange Management Act (FEMA), restrict NRIs from maintaining standard savings accounts in the country. Instead, they are required to use NRE or NRO accounts to manage their funds.

These accounts are not just legal requirements but also practical tools for handling foreign earnings, repatriating money, and managing Indian income such as rent, dividends, or pensions.

Know all about NRE accounts

An NRE account is specifically designed for NRIs to deposit foreign income in India. These accounts are denominated in Indian rupees, meaning that any money deposited in a foreign currency is converted into INR. One of the notable features of an NRE account is that both the principal and the interest earned are exempt from Indian income tax.

This makes it a popular choice among NRIs looking to save on taxes while maintaining the ability to move funds freely between India and their resident country.

The primary purpose of an NRE account is to provide a seamless way to repatriate foreign earnings to India without any restrictions. These accounts are versatile, offering options for savings, fixed deposits, and recurring deposits.

Additionally, they come with international debit cards for easy access to funds. However, one should note that only foreign income can be deposited into an NRE account.

Know all about NRO accounts

On the other hand, an NRO account is meant for managing income earned within India. This could include sources such as rent from properties, dividends from investments, or pension payments. Like the NRE account, the NRO account is also rupee-denominated, but it allows deposits in both Indian and foreign currency.

While NRO accounts provide flexibility for managing Indian income, they are subject to taxation. The interest earned on these accounts is taxable under Indian laws, with Tax Deducted at Source (TDS) applied directly by the bank.

Furthermore, repatriating funds from an NRO account is limited to $1 million per financial year, and such transfers require documentation, including a chartered accountant’s certificate.

What are the key differences?

The fundamental difference between these two accounts lies in their purpose. An NRE account is ideal for holding foreign earnings in India, while an NRO account is specifically for managing income generated within India.

Another key distinction is in their tax treatment. While NRE accounts offer complete tax exemption on the interest earned, NRO accounts are taxable. However, India’s DTAA agreements with various countries can help mitigate the tax liability on NRO accounts. To avail of these benefits, NRIs must submit a Tax Residency Certificate (TRC) and other required documents to their bank.

Additionally, NRE accounts allow the free repatriation of funds to the account holder’s resident country. In contrast, NRO accounts have repatriation limits and are generally used for local financial management. The choice of account, therefore, depends on the nature of the income and the financial goals of the account holder.

So, which account is right for you?

The decision to open an NRE or NRO account should be guided by the individual’s income sources and financial needs. For those whose earnings are predominantly foreign, an NRE account is a choice for its tax benefits and repatriation flexibility. However, for managing Indian income, an NRO account becomes necessary.

NRIs often maintain both accounts to efficiently manage foreign and domestic income streams. This ensures that they can enjoy the benefits of tax-free earnings on foreign income while meeting obligations related to income generated in India.