Choosing the Right NRI Account: NRE or NRO Account

As per the RBI Regulations, an NRI (Non-Resident Indian) can open three types of bank accounts in India – NRE (Non Resident External) account, NRO (Non Resident Ordinary) account and FCNR (Foreign Currency Non Resident) account. These accounts are differentiated amongst themselves with different benefits and restrictions regarding inward remittances/ transfers, fund repatriation, joint operations, etc. Out of the above, NRE and NRO accounts can be opened for savings or current accounts, while FCNR accounts can be opened only as deposit accounts. An NRI can choose between NRE or NRO account for regular banking operations. The salient features and points of difference between NRO and NRE accounts are discussed below to help one make an informed decision:

1. Foreign Currency Credits – There is no distinction between NRO or NRE accounts when receiving inward foreign currency remittances. Both types of accounts can receive such remittances from outside India.
2. Rupee Credits – This is a significant operational difference between NRO accounts and NRE accounts. While NRO accounts can accept rupee credits, NRE accounts cannot accept any inward transfers in Indian currency. NRE accounts cannot be used to receive any income from within India. Such income can include rental income, dividend income, sale proceeds from an Indian asset, etc., and one can only use NRO accounts for these uses. Further, only NRO accounts can be linked with Demat accounts and receive Income Tax Refund from the Income Tax Department.
3. Flexibility in the repatriation of funds – While NRO accounts can receive rupee credits, such accounts don’t offer free repatriation of account balances. The repatriation of the principal amount deposited in such an account is subject to specified limits under the FEMA Regulations, while the interest income can be repatriated without any restrictions. In contrast, the account balances of NRE accounts are freely repatriatable.
4. Taxation of Interest Income – As per the current tax laws, the interest income on NRE accounts is tax-free for the NRIs. In contrast, the interest income from NRO accounts is taxable in India. However, the provisions of Double Taxation Avoidance Agreements (DTAAs) may be seen to avoid double taxation of such interest income in different countries of residence for NRIs.
5. Joint Operations – NRO accounts are flexible regarding joint operations, wherein such accounts can be held in joint name with either a resident Indian or another NRI. In contrast, an NRE account can be held jointly only with another NRI. An NRE account cannot be held jointly with another resident Indian. However, a resident Indian can be appointed as a mandate holder for the NRE account for convenience in the account operations.
6. Foreign Currency Loan against Account – NRIs are free to pledge NRE accounts against overseas loans taken in foreign currency. In contrast, NRO accounts cannot be pledged against such foreign currency loans. This differentiation is in line with the repatriation restrictions applicable to these accounts.

While NRO accounts are flexible for inward rupee credits and joint operations with resident Indians, NRE accounts provide convenience in funds repatriatibility and tax benefits on the interest income. With the above points of distinction, one can choose the right NRI account for themselves as per their banking needs.

Disclaimer – The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules, as tax benefits are subject to changes due to change in tax laws.