To understand non-resident external (NRE) vs. non-resident ordinary (NRO) accounts, it helps to know who they serve: the global community of non-resident Indians (NRIs) and persons of Indian origin (PIOs).
NRIs and PIOs have a huge impact on the world economy. Together, they form the world’s largest diaspora (a group of people who live outside their country of origin).
In 2022, Indians sent $111 billion USD back home from NRI accounts, making India the world’s top receiver of remittance payments. With more than 32 million Indians living overseas, managing those funds is no easy task for India’s banking system.
To ensure overseas Indians can send money back home and better handle so many transactions, the Reserve Bank of India (RBI) established two main NRI accounts for those who hold and manage income in India:
• NRE accounts
• NRO accounts
Both can hold regular savings or checking accounts, recurring deposits, and fixed deposits subject to certain maturity terms.
With so many NRIs and PIOs relying on these accounts as financial lifelines to India, determining the right account for you is critical. The key distinctions between NRE and NRO accounts can be nuanced, especially with financial goals in mind.
This article examines these distinctions and helps you choose the account that best meets your needs as an NRI or PIO.
What is an NRE rupee account?
Designed specifically for NRIs and PIOs with income earned outside India, NRE accounts enable you to deposit, save, invest, and transfer funds seamlessly between your country of residence and India.
As with any financial tool, it’s important to understand the specific regulations of NRE rupee accounts. Familiarity with these rules will enable you to effectively manage your money, leverage the account’s advantages, and ensure compliance with Indian financial regulations.
What is an NRO rupee account?
NRO rupee accounts are for NRIs and PIOs who earn income in India. Their purpose is to help you manage and use your Indian income while living abroad. NRO accounts enable you to pay bills, transfer funds, and manage rental earnings or investment dividends — all from income earned in India.
NRO holders should also be aware of the regulations that apply to their accounts. It’s important to understand your tax liability on interest income earned in India and restrictions on the repatriation (transfer) of funds from your NRO account to accounts in your country of residence.
NRE vs. NRO accounts: What are the differences?
Knowing the differences between NRE and NRO accounts can help you create the best plan for your financial goals.
Here’s a high-level breakdown of the two account types:
• NRE accounts are for foreign income and enable unlimited, tax-free repatriation of both principal and interest balances overseas.
• NRO accounts are for income earned in India and have set limits on capital repatriation.
Let’s explore their key differences further.
1. Repatriation
Repatriation rules differ quite a bit between NRE and NRO accounts. You can freely transfer NRE account funds back to your country of residence without restrictions. This provides easy access to internationally sourced savings wherever you reside abroad.
In contrast, repatriating balances from an NRO account is limited to $1 million USD per financial year.
2. Currency
Currency conversion is another big difference between NRE and NRO accounts, with NRE accounts offering more flexibility.
You can deposit foreign currency into NRE accounts. It’s then converted to Indian rupees (INR), which you can convert back to foreign currency for repatriation. This versatility helps in managing overseas earnings. earnings.
NRO accounts restrict deposits and withdrawals to INR only.
3. Tax
Taxation rates are another major difference between NRE and NRO accounts. Interest earned on funds in an NRE account is tax-free in India, while interest earned on funds in an NRO account is subject to a 30% tax deducted at source.
Although NRO account funds are taxed at a higher rate, many NRIs and PIOs still find them attractive because NROs typically offer higher interest rates.
4. Joint accounts
Both NRE and NRO accounts enable joint ownership, but there is one difference worth noting. You can only hold NRE accounts with another NRI or PIOs, while NRO accounts allow joint ownership between NRIs and resident Indians. This offers flexibility for NRIs and PIOs with family members in India they wish to include in local rupee transactions.
5. Source of funds
Another contrast between NRE and NRO accounts is the origin of the income you’re managing.
You can only deposit money earned outside India in an NRE account. NRO accounts enable both foreign income and income generated within India. An NRO account can hold funds earned inside India, such as from rental payments, employment, or dividends.
Knowing this difference is key in complying with India’s tax laws and other regulations.
6. Exchange rates
Another big thing to consider when comparing NRE and NRO accounts is the risk associated with exchange rate changes.
Because NRE accounts only accept foreign income deposits, they are more exposed to exchange rate changes. NRO accounts are solely for Indian rupee deposits, making exchange rates less of a factor.
Tracking exchange rates can help manage changes in the market and between currencies. Most importantly, it helps minimize exchange rate losses. If you frequently need to convert currency, learning more about the best ways to exchange currency can also be a big help in meeting your financial goals.
Can I have both an NRE account and an NRO account?
Yes, NRIs and PIOs can hold NRE and NRO accounts at the same time. These accounts are designed to provide flexibility in managing your financial affairs between India and your country of residence. This also enables NRIs and PIOs to take advantage of the benefits of each type of account.
Can I convert an NRE account to an NRO account and vice versa?
Changing an existing NRE account to an NRO account is not straightforward. The accounts meet different needs and are strictly regulated. Regulatory obstacles to converting a pre-existing NRE to an NRO typically make opening a new NRO the best option if you want both types of accounts.
It’s best to contact your bank if you have strong reasons for converting your NRE account to an NRO account, such as changes in your source of income. They can walk you through the process.
Choosing between an NRE or NRO account
A key factor in selecting either an NRE or an NRO account is the origin of the income you want to manage in India.
• NRE accounts are designed primarily for those who earn money outside India, enabling tax-free transfer of both principal and interest.
• An NRO account may make sense for those who generate income in India, such as rental income or investment dividends. An NRO account also enables management and repatriation of India-based earnings, although with some restrictions and taxation on interest.
Why it matters: It’s important for NRIs and PIOs to think through repatriation needs, tax implications, and other considerations to make an informed decision.
For many NRIs and PIOs living abroad, easily transferring funds back home is a must. Whether you have an NRE or NRO account, Western Union offers convenient ways to send money to India.
*Any and all information by or on this site is provided for promotional or informational purposes only, is not to be relied upon as a professional opinion whatsoever, and is not guaranteed to be accurate, complete, reliable, current or error-free.
