NRE stands for Non-Resident External and NRO stands for Non-Resident Ordinary. These are two major categories of accounts available for NRIs. Though both the accounts are saving accounts a few stark differences can be seen. To understand the functioning of both following differences should be taken into consideration.
NRO and NRE accounts both have the same purpose, to help NRIs transact in India but the difference lays in the handling of the accounts and they entail diametrically opposite terms and conditions.
An NRO account is opened in India by an NRI in his name to manage the money he earned in India, including rent, dividend, pension, interest etc. Whereas NRE account is opened by an NRI in his name to manage the money he earned outside India.
Balance and interest earned on NRE accounts are not taxable, these accounts are exempted from tax but when interest is earned on an NRO account it is taxable at 30% according to provisions of the Income Tax Act 1961.
In NRE accounts, the principal amount, as well as the interest, can be transferred to a foreign account, in other words, it can be repatriated. As for the NRO account, the interest amount can be transferred though the principal amount can be remitted only up to USD1 million in one financial year.
An NRI can open a joint NRO account with one or multiple NRIs and also with the resident citizens. Where the NRE account can only be operationalised jointly with other NRIs.
Money earned from India can be deposited only into NRO accounts whereas money earned from outside India can be deposited either into NRO or NRE accounts. Withdrawals, from any of the two accounts, can be made only in INR.
In an NRO account when the deposit and withdrawal are in INR, the exchange rate risk is minimal but in the NRE account, the exchange rate risk is more prominent due to the volatility of the currency.
An NRI can hold both NRE and NRO accounts. He/she can open both NRE and NRO accounts as per their requirements, the difference would only be of depositing the money earned in India in the NRO account and money earned from foreign sources in NRE accounts.
NRE accounts can turn beneficial only if the NRI has a family in India to look after. It is very helpful when it comes to transactions and even carries better interest rates. NRO is very useful to manage income made from India and make investments in India even in the form of purchases.
To sum up, it can be said that if the total income of an NRI includes the money earned in India and wish to manage it within the country, the NRO accounts are a viable option. Whereas if an NRI wishes to transfer his foreign income to India and wishes to avoid tax, the viable option would be an NRE account. Both the accounts help to keep the money safe and offer limitless access to these accounts, irrespective of where an NRI stays.
