Difference between NRE and NRO Accounts
NRE vs NRO Accounts: A Complete Guide for NRIs:
Non-Resident Indians (NRIs) often need to manage their finances in India, and two common options for this are the Non-Resident External (NRE) Account and the Non-Resident Ordinary (NRO) Account. Both accounts cater to different needs, with distinct benefits and limitations. Understanding the differences between these two types of accounts is essential for making an informed decision.
What is an NRE Account?
The Non-Resident External (NRE) Account is primarily designed for NRIs who wish to park their foreign earnings in India. The money in an NRE account is held in Indian Rupees (INR) but is funded by foreign currency. This account offers several benefits, including full repatriability of both the principal and interest without restrictions.
Key Features of NRE Accounts:
• Purpose: Ideal for NRIs who wish to manage and transfer foreign income to India.
• Currency: Deposits are made in foreign currency, converted into INR.
• Repatriation: Both principal and interest are fully repatriable to the NRI’s country of residence.
• Taxation: The interest earned is exempt from Indian income tax.
• Joint Holding: Can be held jointly with another NRI or a close relative who is a resident Indian.
What is an NRO Account?
The Non-Resident Ordinary (NRO) Account is designed to manage income earned in India, such as rent, dividends, or income from Indian investments. Funds can be deposited in both Indian and foreign currency, but withdrawals are only in Indian Rupees. However, unlike the NRE account, the interest earned in an NRO account is subject to Indian taxation.
Key Features of NRO Accounts:
• Purpose: Suitable for managing income earned in India.
• Currency: Deposits can be made in both INR and foreign currency.
• Repatriation: Funds can be repatriated up to USD 1 million per financial year, subject to tax compliance.
• Taxation: Both the principal and interest earned are taxable in India, with TDS (Tax Deducted at Source) applicable.
• Joint Holding: Can be held jointly with an Indian resident or another NRI.
Comparing NRE and NRO Accounts
To help you better understand the differences, here’s a detailed comparison of NRE and NRO accounts:
Basis NRE Accounts NRO Accounts
Definition An account that allows you to park your foreign earnings in India, in Indian Rupees (INR). An account that helps you park your earnings from India in Indian Rupees (INR).
Taxation Deposits in NRE accounts are tax-free. Both the principal and interest earned are exempt from Indian tax. The interest earned in NRO accounts is subject to Tax Deducted at Source (TDS).
Repatriability (Transferability) Funds in NRE accounts are fully and freely repatriable. Both the principal and interest earned can be transferred abroad without any restrictions. Funds in NRO accounts can be repatriated after the payment of applicable taxes, with a limit of USD 1 million per financial year.
Suitable Conditions Opt for NRE accounts if you wish to maintain overseas earnings in Indian currency or want to keep your savings liquid in India. Opt for NRO accounts if you want to save income earned in India, such as rent, dividends, or income from property sales.
Holding Structure NRE accounts can be held jointly with another NRI or a close relative who is a resident Indian. NRO accounts can be held jointly with an NRI or any Indian resident.
Transferring Funds from NRO to NRE Accounts
NRIs often wish to transfer funds from their NRO accounts to NRE accounts to take advantage of the tax exemptions and the easier repatriation process available with NRE accounts. The Reserve Bank of India (RBI) allows such transfers within an annual limit of USD 1 million. To complete this process, the following documentation is required:
1. Chartered Accountant’s Certificate (Form 15CB): This certificate ensures compliance with Indian tax regulations and confirms that applicable taxes have been paid.
2. Form 15CA Submission: This is an online declaration to the Indian Income Tax Department confirming the remittance of funds.
Benefits of NRE Accounts:
1. Tax-Free Interest: Interest earned on NRE accounts is exempt from Indian income tax, making them an attractive option for NRIs.
2. Full Repatriation: Both the principal and interest in NRE accounts can be repatriated to the NRI’s country of residence without restrictions.
3. Joint Ownership Flexibility: NRE accounts can be held jointly with other NRIs or a close relative who is a resident Indian, offering more flexibility for family or joint financial planning.
Benefits of NRO Accounts:
1. Convenience for Indian Income: NRO accounts are ideal for managing income earned in India, including rental income, dividends, and income from property sales.
2. Joint Ownership with Residents: NRO accounts can be held jointly with resident Indians, making it easier to manage finances for families with both NRI and resident members.
Key Considerations
• Tax Compliance: Funds in NRO accounts are subject to Indian income tax, and TDS (Tax Deducted at Source) is applicable.
• Repatriation Limits: The maximum amount that can be repatriated from an NRO account is USD 1 million per financial year.
• Documentation for Transfers: To transfer funds from an NRO to an NRE account, NRIs need to provide the necessary tax certifications and declarations, including Form 15CB and Form 15CA.
Conclusion
Both NRE and NRO accounts serve distinct purposes for NRIs, with NRE accounts being more beneficial for managing foreign income and NRO accounts being ideal for income earned within India. The decision to choose one over the other depends on your specific financial needs and the source of your income. Understanding the differences, along with the tax implications and repatriation options, will help you make the right choice for managing your funds effectively in India.
Contact Us
In case of any clarifications or further assistance, feel free to reach out to us. We are happy to help you with all your NRE and NRO account-related queries.