What is NRE and NRO accounts

Non-resident Indians always end up in a confusing task about managing their finances especially earnings and investments, from outside India. Among the many options available, two types of bank accounts stand out for their unique benefits and specific purposes: the Non-Resident External (NRE) account and the Non-Resident Ordinary (NRO) account.

From the flexibility of repatriation to the intricacies of taxation, we’ll try to cover everything one needs to know to optimize the banking strategy as an NRI. Let’s explore how NRE and NRO accounts can serve the financial needs and simplify banking experience from outside India.

What is an NRE Account?
A Non-Resident External (NRE) Account is an Indian rupee-denominated bank account that NRIs (Non-Resident Indians) can open in India to deposit their foreign incomes. NRE accounts can be of several types, including savings accounts, current accounts, recurring deposits, and fixed deposit accounts.

Both principal and interest are fully repatriable, which mean you can transfer funds back to your foreign account freely. Interest earned is tax-free in India. Deposits and Withdrawals can be made in foreign currency, but withdrawals are made in INR as it is not allowed to hold foreign currency in India. These accounts can be opened individually or jointly, but joint accounts can be opened with other NRIs only and not with resident Indians

What is an NRO account?
An NRO account is a savings or current account held by NRIs in India to manage their income earned in India like interest, dividends or rental incomes etc. Account – holders can deposit and manage their accumulated rupee funds without any hassle. The account allows you to receive funds in Indian or Foreign currency. NRIs can open NRO accounts jointly with either a resident or non-resident Indian. It is even feasible to transfer money from your current NRE account. However, the interest you earn in this account is subject to tax and TDS provisions.

Deposit, Withdrawals and Taxation:
When it comes to deposits, the NRE account allows the deposition of funds earned abroad in foreign currency at the bank branch. However, depositing Indian rupees directly earned in India are not permissible in an NRE account. On the other hand, the NRO account provides more flexibility, allowing deposits in any currency, including both Indian rupees and foreign currency. Similar to NRE accounts, foreign currency deposits in an NRO account will be converted to INR.

Withdrawals for both the accounts can be made in INR only.

The interest earned in NRE account is completely tax-free in India and applicable to any accrued interest on the account balance. Both the principal amount deposited, and the tax-free interest can be freely repatriated abroad without any tax implications.

Under NRO account, the interest earned is subject to Tax Deducted at Source (TDS) at 30% or as per the prevailing DTAA agreements. NRO accounts have limited access for repatriation. An NRO account restricts you from remitting more than USD 1 million inclusive of taxes during an assessment year. You can repatriate the interest amount freely, but the principal amount can be repatriated only within set limits. It also requires an undertaking along with a certificate from a Chartered Accountant.

Conclusion:
Considering all the rules and provisions related to these two accounts, i.e. their repatriation, deposits, withdrawals or taxation etc. one has to decide the type of account he wishes to open. There are also certain restriction on opening account jointly. The most common fact about both these accounts is that the withdrawals can only be made in INR.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.