NRO & NRE Accounts – Meaning, Comparison & Importance

Globalization has resulted in the constant movement of people across the world. People who migrate to other nations for better job opportunities often contribute to the income of their home country via remittances. Indians are known to be one of the biggest expat communities, as many work and live across multiple countries. With millions of Non-Resident Indians (NRIs) and People of Indian Origin (PIOs) residing outside the country, billions of dollars of remittance come back to the country every year.

As per Indian law, Indian citizens who are working and earning abroad cannot transact using a bank savings account. To facilitate financial transactions of such individuals, there are NRE and NRO bank accounts. Non-Residential External (NRE) and Non- Resident Ordinary (NRO) accounts are the two primary account categories available for NRIs and PIOs. These are also popular options for saving money in India.

NRIs or PIOs earning in a foreign nation and looking to transmit money to India must open an NRE or an NRO account. Here, we will discuss these two account categories in detail and understand key differences between the two. 

What is a non-resident rupee (NRE) account?

NRIs or PIOs can open an NRE account for transmitting money to India. This Indian rupee-denominated account offers complete safety and security of transactions. It comes in the form of either savings account, current, recurring, or fixed deposits. The foreign currency deposited in this account is automatically converted to INR. 

An account holder can transfer funds from an NRE account to a foreign account without any hassles or restrictions. It is important to note that the amount deposited in these accounts has to be earned outside of India. NRE accounts also come with international debit cards and these enable account holders to make transactions 24*7. 

NRE accounts are mainly used for business and personal banking. It can also be used for making investments, such as mutual funds, in India.

Additional read – 7 best investment options for NRIs in India

What is a non-resident ordinary rupee (NRO) account?

Similar to NRE accounts, NRO accounts are also Indian rupee-denominated savings or current accounts that can be held by NRIs in Indian banks. These accounts help NRIs and PIOs to manage their income earned in India through rent, salaries, dividend earnings, etc. The deposits in these accounts can be in Indian or foreign currency. The account can be held jointly with a resident Indian or an NRI. Unlike NRE accounts, any interest earnings on NRO accounts are taxable at 30% (plus surcharge) and other applicable taxes in India. 

NRIs must furnish a Tax Residency Certificate issued by Tax Authorities of the country of residence for availing lower tax rates as per double taxation avoidance agreement (DTAA) entered in by India. 

Additional read – Can NRIs invest in mutual funds in India?

What are the similarities and differences between NRE & NRO accounts?

Here are some of the unique features and characteristics of NRE/NRO accounts that help in differentiating between the two account formats:

1. Remittance of foreign income to India–Both NRE and NRO accounts allow foreign currency credits. Both the accounts equally cater to the purpose of having a bank account for facilitating easy transfer of foreign income to India.
2. Depositing earnings from India–If an NRI/PIO is making income through dividends, rental income, business earnings, etc. in Indian currency, they must open an NRO account only. An NRE account does not permit transactions in Indian currency.
3. No currency risk–Those who want to remit funds to India and utilise the same in India itself can benefit through both NRE and NRO accounts by eliminating the currency risk. This is mainly since the amount deposited in the accounts gets converted into Indian rupees at the time of deposit itself and the balance is then carried forward in Indian currency.
4. Repatriation of funds–Repatriation of funds is the ability to remit money to bank accounts in other countries. NRE and NRO accounts allow NRIs/PIOs to seamlessly repatriate any interest earnings without any restrictions. With regards to the principal amount, only NRE accounts allow repatriation of funds without any restriction. Any balance outstanding in NRO accounts, other than interest income, is subject to certain limits.
5. Taxability–An important aspect to consider for NRIs/PIOs while opening an NRI account is the taxability. As per the Indian Income Tax Act, any interest income on the balance in NRE accounts is tax exempt. However, in case of NRO accounts, there is no such exemption. Therefore, NRO account holders are required to pay taxes as applicable for the interest earnings.
6. Joint ownership–NRIs/PIOs who want to have easy access to funds in bank accounts held in India generally opt for joint ownership in the account. NRE account can be opened along with another NRI ‘and’ close relative who is a resident Indian. An NRO account can be opened with an NRI ‘or’ any Indian resident.

Here is a tabular representation of the similarities and differences between NRO and NRE accounts:

Features	NRO Accounts	NRE Accounts
Remittance of foreign income to India	Allows foreign currency credits.	Allows foreign currency credits.
Depositing earnings from India	Permits transactions in Indian currency.	NRE account does not permit transactions in Indian currency.
Currency risk	Since deposits are converted into INR, there is no currency risk.	Since deposits are converted into INR, there is no currency risk.
Repatriation of funds	Balance outstanding other than interest income is subject to certain limits.	Allows repatriation of funds without any restriction for both principal and interest amount.
Taxation	No tax exemption and account holders are required to pay taxes as applicable for the interest earnings.	Any interest income on the balance in NRE accounts is tax exempt.
Ownership	NRE account can be jointly opened along with another NRI ‘and’ close relative who is a resident Indian.	NRO account can be jointly opened with an NRI ‘or’ any Indian resident.

What is the need for NRE & NRO accounts?

As per the guidelines announced by Foreign Exchange Management Act (FEMA), an NRI is not permitted to have a savings bank account under his or her name in India. One can therefore deposit all savings (money earned in foreign countries) into a Non-Resident External Account (NRE) or Non-Resident Ordinary (NRO) account. If one uses the savings bank account in India, despite being a NRI/PIO, it can attract hefty penalties. Thus, opening an NRE or NRO account is a viable solution for Non-Resident Indians. It can allow NRIs/PIOs to send their foreign earnings to India at any time and they can also retain their earnings from India in the home country itself.

Conclusion

Those who generate income through employment or assets abroad can open an NRE account to ensure unrestricted movement of funds between India and country of residence. NRIs who have the majority of their earnings from investments or assets in India can only deposit such earnings in NRO accounts. Having both these accounts can also allow NRIs to freely move funds between these two accounts by furnishing necessary documentation. 

Before opening either of these accounts, one must assess the NRI category that they belong to and accordingly decide on the banking modes.

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