Difference between NRE and NRO Account

Why is it important for NRIs to open NRE or NRO Account?

As per RBI Regulations, a Non-Resident Indian (NRI) cannot open and operate a regular resident Savings Account and further, any account should be converted into NRI Account by the bank before one gets NRI status. It is essential for an NRI to open Non-Resident External (NRE) or Non-Resident Ordinary (NRO) Account, to do any banking transactions in India. However, depending upon the transactional requirements of the NRI/PIO, he/she can decide to open either an NRE or NRO Account, or even both.

Importance of NRE & NRO Accounts

1. Remitting foreign income to India – Both the types of NRI Account in India, NRE Account and NRO Account, can receive foreign currency credits. If the purpose of opening a bank account is to facilitate easy transfer of foreign income to India, NRI/PIO can be indifferent to open NRE or NRO Account.
2. Receiving Indian income in NRI Account – An NRI may be earning income in the form of dividends, rental income, business income, etc. in Indian currency. For any such credits, an NRI must open NRO Account only. An NRE Account does not allow any credits in Indian currency and may reject the transaction.
3. Elimination of currency risk – If your purpose of remitting funds to India is to utilise such funds in India itself, both NRE and NRO Accounts make it possible for the NRI to eliminate the currency risk. This is because the amount received in the account is converted into Indian currency at that time itself and thereafter the balance is carried forward in Indian currency only.
4. Repatriation of funds – Both NRE, as well as NRO Accounts, allow the NRI to freely repatriate the interest income without any restrictions. However, in terms of the principal amount, only the NRE Account enables the repatriation of the funds without any limit. The balance outstanding in NRO Account, excluding the interest income, is subject to prescribed limits. In simple words, repatriation of funds means the ability to remit the money to bank account abroad.
5. Taxability – This might be another important consideration for the NRIs while they consider opening an NRI Account. Ensuring tax compliances in India may be an undesirable activity for someone living in the US, and hence, they may like to stay free from any such compliance requirements. As per the relevant provisions of the Indian Income Tax Act, the interest earned for the balance in NRE Accounts is tax-exempt. If there is no other taxable income in India for the NRI, he/she is not required to even file his/her Income Tax Return (ITR) in India or to pay any tax in India. However, NRO Account does not have any such exemption and accordingly, the account holder would be required to pay taxes as applicable for the interest income earned on NRO Account.
6. Joint operations – An NRI may want easy access to the funds available in NRI Account for their parents and family. Having joint operations in the account is the most commonly used method to fulfil such requirements. However, NRIs/PIOs must note that while an NRE Account can be opened in joint name with NRI/PIO, it can be operated jointly with a resident Indian relative on ‘former or survivor’ basis. Also an NRO Account can be opened jointly with NRIs/PIOs and with resident Indian on ‘former or survivor’ basis.

While NRE Accounts score higher in terms of ease and tax-exempt status, NRO Accounts can be more convenient if regular operations in India are required along with receipt of credits into the bank account from the income sources within India. NRIs must take an informed decision regarding opening of their NRI Account, after considering the above points.

The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules for you, as tax benefits are subject to changes due to change in tax laws. The tax laws as stated above are updated till Finance (No. 2) Act, 2019, i.e., Union Budget 2019.

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