Difference between NRO and NRE Accounts

Foreign Exchange Management Act (FEMA) guidelines have stipulated rules for handling money earned by Non Resident Indians (NRI). These rules are applicable to their earnings both in India and abroad. Non Resident Indians are prohibited from using their Savings Account in India for transferring income earned abroad as well as for income they are generating in India. Utilising Savings Account for these earnings may subject the NRI to hefty penalties.

However, NonResident External (NRE) Account and Non-Resident Ordinary (NRO) Account are effective solutions to these practical issues encountered by NRIs. These accounts enable NRIs to transfer to India the funds they are generating abroad as well as manage income which is accruing to them in India when they are away to any other country.

Differences between NRE & NRO Account

NRE and NRO Accounts have their own distinct characteristics and features based on which NRIs may open either of these accounts with Indian banks.

These differences are as discussed:

Account Opening:

All NRIs can open NRE or NRO accounts depending on their requirement. Individuals/ entities that are nationals/under the ownership of citizens of countries like Pakistan or Bangladesh require approval from the Reserve Bank of India for opening an NRE Account with any of the Indian banks.

While, an NRO Account can be opened by any NRI, except for residents of Nepal and Bhutan. Erstwhile OCBs, Individuals or entities belonging to Pakistani or Bangladeshi nationality or ownership require approval from Reserve Bank of India for opening an NRO Account.

Funding of Accounts:

Initial funding for opening of NRE accounts can be done by transferring funds from another existing NRE account of the account holder; by proceeds of traveller cheques and foreign currency notes owned by the NRI and provided by him at the time of his temporary visit to India; or amounts remitted by the NRI to any other Indian Account by mode of transfer.

Funding of NRO accounts can be done by any of the modes listed for funding of NRE accounts. Funds from any local source which represents bonafide transactions in Indian rupees is also permissible for NRO account funding.

Nature of Funds:

Overseas earnings in foreign currency are transferred to NRE account. NRE Account is used for parking income earned abroad and remitted to India post-conversion to Indian Rupee. 

NRO account, on the other hand, takes care of NRI’s income generated in India. Income from sources like rent, salary, dividend, etc. are parked by NRI’s in NRO accounts.

Repatriation of Funds:

Repatriation of funds can be segregated into repatriation of principal component and repatriation of interest component.

Repatriation is freely permissible for NRE Account holders for both principal and interest components.

Principal part cannot be freely repatriated for NRO Account holders. An amount of USD 1 million or its equivalent inclusive of taxes may be repatriated out of the balance held in NRO Account every financial year.

This limit of USD 1 million is inclusive of sale proceeds of any immovable property held by the NRI for a period of ten years.In the event of sale of immovable property within the said period, the proceeds should have been held in the account for the balance period. Such repatriation is permissible for reasons such as education of children, medical needs of family members, etc. This can be done with a self-undertaking along with a certificate from Chartered Accountant. The principal amount can however be used for local payments. Interest component can be repatriated freely for NRO accounts as well.

Deposits and Withdrawals:

For NRE accounts deposition is in foreign currency and withdrawal is in Indian currency. Whereas for NRO accounts deposition can be done in both foreign as well as Indian currency but withdrawal is restricted to Indian currency.

Prone to Exchange:

NRE Accounts are prone to currency exchange risks whereas there is no risk of currency exchange for NRO accounts.

Mode of Holding:

NRE Account can be held jointly with NRIs only whereas for NRO Accounts there is an option of holding jointly with both resident as well as non-resident.

Applicability of Taxation: 

NRE Accounts are tax-free. Both Income tax, as well as gift tax laws, do not apply to NRE accounts.

NRO accounts, on the other hand, are subject to both Income tax as well as gift tax. Interest earned and credit balances held in NRO accounts are both subject to taxes according to applicable income tax slabs.

Feasibility of Taking Loans:

Loan up to an amount of Rs 100 lakh may be extended to an NRE account holder if the amount is intended to be used up in India itself. However, foreign currency loans cannot be provided. NRE account holders have the option to use loans abroad provided the amount is wholly used abroad and is not fully or partially repatriated to India.

Loans in India may be sought for personal or business requirements, but the usage of funds for re-lending, investment in real estate, agricultural and plantation activities is completely prohibited. Loans in India may also be sought for the purchase of a house in India for residential purpose or direct investment by mode of contribution to Indian companies and firms.

Loans in India may be extended to NRO account holders. However, they do not have options of seeking loans abroad or loans in foreign currency in India. Loans in India may be sought for personal or business requirements, but the usage of funds of re-lending, investment in real estate, agricultural and plantation activities is completely prohibited.

Similarities between NRE & NRO Accounts

In spite of all the above differences, there are a host of similarities between NRE and NRO accounts. Few of them are listed below.

Both the accounts are Indian Rupee accounts.

Nomination facility is permitted in both.

Savings, Current and Fixed Deposit options are available for both the accounts.

Rates of interest applicable to savings and term deposits are linked to NRE and NRO accounts. However, interest rates cannot be higher than interest rates offered by banks on domestic deposits made in rupees.

In case NRI has issued power of attorney to any resident, permissible operations are restricted to local payments and remittance to NRI’s account only for both NRE & NRO accounts.

To summarise if the total income includes income earned in India and the person intends to manage the same in India itself, he should opt for an NRO account. NRE account should be preferred to handle foreign income in India and avoiding taxation liabilities.

Also Read: 10 Best NRE Savings Accounts for NRIs

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