Demystifying finance for NRIs- Understanding NRE and NRO accounts

Introduction:

With earnings in both India and abroad, managing finance for NRIs has never been a walk in the park. With FEMA guidelines halting the use of a savings account for NRIs in India, they are forced to adopt other viable options to manage their finances. The most effective option that stands out is the use of NRE and NRO accounts. These accounts not only help NRIs transfer money to India, but also aids in retaining various sources of income generated at home. In this article, we will shed light on the key differences along with the need for an NRE or NRO account for a non-resident Indian.

What is an NRE account?

NRE account means a Non-Resident External account  in simple terms, is a bank account used for the purpose of maintaining and transferring foreign generated earnings to India. These accounts can be in the form of savings, fixed deposits, recurring or current accounts. The money deposited in an NRE account is converted to INR, however, this does not hinder its transfer to a foreign account. An NRE account comes with an internationally accessible debit card that allows you to do seamless transactions 24/7.

What is an NRO account?

A Non-Resident Operations account or NRO account, is a savings or current bank account that is created solely for the purpose of managing the income earned in India by an NRI. As an NRI, there is a very high possibility for various income sources to exist in India, hence an NRO account allows NRIs to deposit and manage such accumulated revenues with ease. 

What are the key difference between NRE and NRO account?

Even with similarities, an NRE and NRO account are completely different entities. Hence, it becomes a necessity for an NRI to know the key differences that exist between a NRE and NRO account before opening one. These accounts differ in both functions and characteristics. Let us take a closer look at some of these differences.

Taxation :

While an NRE account is completely free of income taxes, interest earned through NRO accounts are subject to Tax Deductible at Source (TDS). This interest is taxable at 30% according to the Income Tax Act 1961. However, as an NRI, you may avail the reduced tax benefit under the Double Taxation Avoidance Agreement (DTAA).

Transferability :

In the case of a Non-Resident External account, all deposits including the complete interest earned, are fully repatriable. However, NRO accounts have repatriation limits. Even though it allows free repatriation of the interest amounts, an NRO account restricts the remitting of more than 1 million USD of the principal amount inclusive of taxes during an assessment year. 

Joint accounts

The creation of a joint NRE account is only possible if both of the people sharing the account are NRIs. However, a joint NRO account can be created even if one of the party is an Indian, preferably a close relative as mentioned under Section 6 of the Companies Act 1956.  

Difference in purpose 

NRE and NRO accounts serve completely different purposes and should be carefully evaluated before opening one. NRE accounts are majorly used to store or transfer foreign generated funds to India, while NROs facilitate the management of income earned in India such as rent, business, pension, dividends etc.

Which account should you choose as an NRI?

More or less, NRE and NRO accounts are savings accounts and the choice of opening one completely depends on your unique needs and purposes. One common thing to note is that the average monthly balance you must maintain for both accounts is Rs 75,000 and all withdrawals can only be made INR.

Both accounts are equally significant for an NRI to manage their incomes, hence, by evaluating the key differences that we have covered in the blog, an NRI should carefully choose an account based on his needs.

Conclusion

Managing finances as an NRI is a seemingly complicated task. However, by carefully opting for viable and effective solutions such as NRE vs NRO accounts, you can make sure that you get the most out of your savings in India and abroad. NRO accounts help you maintain and transfer your foreign generated funds with ease. But if you are planning for ways to manage or grow your funds in India, opening an NRO account is a necessity. 

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FAQs On NRE vs NRO Account:

1. Is it possible to have both an NRE and NRO account at the same time?

Since both accounts serve different purposes, NRIs are allowed to have both an NRE and an NRO account at the same time.

2. Is an NRE or NRO account mandatory for an NRI?

As per the FEMA guidelines, an NRI cannot have a savings account in his or her name in India. Hence, it is required to convert all your savings to an NRE or NRO account to avoid hefty penalties.  

3.  Which account should you choose as an NRI investing in mutual funds?

Be it mutual funds, or any other transaction happening in India, NRIs are advised to open an NRO account for its smooth functioning.

4. What happens to my NRE and NRO accounts when I return to India permanently?

Upon returning to India permanently, NRE accounts are suggested to be converted to resident savings accounts as per RBI guidelines. However, NRO accounts can be continued as is or converted to resident accounts based on individual preferences and requirements.

5. Can you use an NRO account for local transactions in India?

Yes, you can use an NRO account for local transactions in India through options such as withdrawals.