What are the differences between NRE and NRO bank accounts?

A non-resident Indian can open two types of accounts in Banks.

1, NRE: Non-Resident Indian External, account
2. NRO: Non-Resident ordinary account.

The difference between these two accounts are as follows:

An NRI can open an NRE account. This will be used for depositing his foreign earnings. An NRI can open an NRO account also. This is to be used for depositing his Indian Earnings. These can be like a dividend from the Indian companies, rent earned through his property in India and any pension he is getting from India.

There is no tax liability for NRE accounts. The person need not pay any tax for the amount deposited in these accounts or the interest he gained from these deposits. But the Interest obtained on an NRO account is taxable. He has to pay tax up to 30% on the interest he obtained as per the income tax act.

The principle amount and the interest obtained on the money in these accounts can be transferred to another foreign account without any problem. If it is an NRO account the interest obtained can be transferred to any other foreign account but you can transfer principle amount only up to one million US dollars in one financial year.

Two NRIs can open a joint NRE account, But the NRO account can be opened jointly with one or more NRIs or Indian citizens.

The income coming from outside India can be deposited either in the NRE account or in the NRO account. But income coming from India should be deposited in the NRO account only. You can withdraw in Indian Rupees only from both the accounts. There is no problem with exchange rates in the NRO account and you will withdraw in INR only. But in case of NRE accounts, as the deposits can be in foreign exchange, exchange rates will affect your amounts.

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Both the NRE & NRO Accounts are designed for taking care of the financial needs of an NRI (The Non-resident Indians) keeping in view of the sources of income wherein,

1. The NRE A/c are referred to as "Non-Resident External", A/c being opened in India in order to keep and manage their income earned by them in the foreign countries. This a/c facilitates conversion of foreign currencies into INR or Indian currency allowing an NRI to maintain foreign currency earnings in Indian Rupees also. In addition, these accounts are exempted from tax and the A/c holder can repatriate the money any time.

Whereas,

2. The NRO A/c. are referred to as "Non-resident Ordinary" which is a bank account opened in India in order to keep and manage the income earned by them in India, like rent, pension, dividends, etc.

Pl. note that unlike NRE accounts, the NRO accounts are not exempted from tax laws which means the income tax, wealth tax, gift tax, etc., are applicable to NRO Accounts while in the earlier one it's not. In addition, the interest rates would vary in the both the accounts depending upon the offers made by the respective banks.

Fluctuation in the exchange rates is also a major difference that lies within these two accounts wherein the NRE accounts having an implication, the NRO accounts are safe.

Adding with another difference within these two then, funds originating from a foreign country can be deposited in both NRE and NRO accounts but the funds originating from within India can only be deposited in NRO accounts.

The similarity within these two however lies in terms of withdrawals of money which only can be made in Indian Rupees or INR.

This is important for our note that there are many leading and well-known banks, both in the public sector as well as in the private sector which offers this facility of NRE and NRO Accounts. The list can include the SBI, ICICI, HDFC, Kotak Mahindra, etc. to name a few.

Depending on the type of income of the non resident Indian he has to open the account in the Indian bank. For his income from the work done in the foreign country of the residence if he wants to deposit the savings out of that in India then he has to open a NRE (Non-Resident External) account and this income is not taxed in India as he would had paid the tax in the country where he had earned it. So, money deposited in NRE account as well as interest earned on it in a bank in India will not be taxed in India. NRE account in one way can be thought as transferring a part of one's foreign income to India. It can be opened in single or joint names but both the persons should be NRI.

At the same time if the person is having some income in India like rent from the property or some investment made in India then the income is treated as local income and is taxable in India at a rate of 30%. These earnings can not be deposited in NRE account and for that another type of the account known as NRO (Non-Resident Ordinary) account is to be opened in the name of the person. It can be opened in single or joint names and the second person can be Indian resident or NRI. To avoid mixing of earnings from foreign sources and Indian sources the Govt of India has devised these two types of accounts (NRE and NRO) for a NRI person.

One important point is the repatriation of money between the two countries. In NRE account the full amount is repatriable while in NRO account the interest part is repatriable and the principle can be repatriable within a stipulated limit of $ 1 million per annum.

NRE a/c is meant only for crediting the amount of remittance coming fromapproved overseas banking channel. This amount can be easily taken back by the Non-resident abroad without any specific permission. The balance in NRE account is free of income taxin India. Even after the Non-resident returns to India permanently some facilities are given for a few more years in NRE a/c

NRO a/c: Even when a person is working abroad, he may be having depoosits, account balance or some kind of income in India . Once the person has gone abroad and become a Non-resident India, these bank accounts in India has to be renamed as Non-Resdient Ordinary. The account can continue to recieve all his incomes,interests etc orginaing from India and can be credited to the NRO account. The balance/income in the NRO a/c is subject to Income tax ru;es in India. The amount can be used for transactions in India for domestic purposes etc. Outside remittance is subject to FEMA rules and permissions.

NRE account is not taxable in India and NRO account is taxable(30% according to the Income Tax Act 1961). In a simple way, If you have income earned inside India and if you wish to manage it within India, then you can choose an NRO account. If you want to transfer your income from a foreign country to India, you need to open an NRE account. This is mainly to avoid tax liabilities.

NRE accounts will fluctuate with the difference of Foreign exchange rates. But NRO accounts will not affect such fluctuations. This is why because the deposit and withdrawal from NRO account will be possible only with Indian Rupees. NRE deposit with foreign currency and because of that it will affect the fluctuations of Exchange rates.

NRI account, with the principal amount and its interest can transfer to another foreign account. But if it a principal amount, you can remit only an amount equal to I million USD in a financial year from an NRO account.

NRE a/c is meant only for crediting the amount of remittance coming from approved overseas banking channels. This amount can be easily taken back by the Non-resident abroad without any specific permission. The balance in the NRE account is free of income tax in India. Even after the Non-resident returns to India permanently some facilities are given for a few more years in NRE a/c

NRO a/c: Even when a person is working abroad, he may be having deposits, account balance or some kind of income from various sources in India. Once the person has gone abroad and becomes a Non-resident India, these bank accounts in India has to be renamed as Non-Resident Ordinary. The account can continue to receive all his incomes, interests, etc originating from India and can be credited to the NRO account. The balance/income in the NRO a/c is subject to Income tax rules in India. The amount can be used for transactions in India for domestic purposes etc. Outside remittance is subject to FEMA rules and permissions.