Living abroad? Know more on NRO vs NRE accounts

Living abroad is a dream and an opportunity for many Indians today. Managing your money in India when abroad is a bit challenging as you are supposed to operate through NRO, NRE bank accounts rather through typical savings or current accounts. Know more on what and how different they are?

Types of Bank Accounts

If you are an NRI, you can have below types of bank accounts in India

Non-Resident Ordinary (NRO) – Savings, Current, Recurring or Fixed Deposit Account. Any person resident outside India can open NRO Account with the bank or authorized dealer

Non-Resident External (NRE) account – Savings, Current, Recurring or Fixed Deposit Account

Foreign Currency Non – Resident (FCNR) Account – It is Fixed Deposit Account opened in designated foreign currency. NRI’s and PIO’s are eligible to open and maintain these accounts with an authorized dealer. Currently, the designated currencies are US Dollar, Pound Sterling, Japanese Yen, Euro, Australian Dollar and Canadian Dollar.

Resident Foreign Currency Account (RFC) – RFC can be opened by an NRI who has returned to India for permanent Settlement for not less than 1 year. The account holder can keep the foreign currency in RFC even if he becomes resident of India

Conversion of Accounts

According to Foreign Exchange Management Act (FEMA) guidelines, an NRI cannot have savings account in his or her name in India. He should convert his resident Savings account to NRO or NRE Accounts

NRE Account: If the account holder returns to India, NRE accounts should be re-designated as resident accounts or the funds held in this account should be transferred to RFC Account at the option of account holder on his return to India for job, business or his intention to stay in India is for an uncertain period.

NRO Account: If the account holder returns to India for stay in India for uncertain period, NRO accounts should be designated as resident accounts.

FCNR Account: If the account holder returns to India for stay in India for uncertain period, deposits in FCNR Account will be allowed to continue till maturity at the contracted rate of interest. FCNR Deposits will be converted to resident rupee deposit accounts from the date of return of account holder to India.

NRE and NRO accounts are designed in such a way that you can send income earned abroad to India, park Indian income or remit such income abroad.

These can be used to support family, parents, relatives, for purposes of investment, for investing in properties or to manage income arising out of India. In case of both the NRE and NRO account, you can open a savings account, current account or a fixed deposit account. However, there are some basic differences between NRO and NRE accounts which you need to be aware of so that you can choose the right account to suit your needs. Let us take a look.

1. Type of Income

As an NRI you can have income arising either in India or in the country where you reside. An NRE account is mean to park your foreign income in India, in Indian rupees. When you deposit foreign currency into a NRE account, it is converted into Indian rupees at current exchange rates. On the other hand, an NRO account helps you manage the income earned in India, in Indian rupees.

2. Taxation

The other important different between NRO and NRE account is the taxation aspect. The interest earned in the NRO account is taxable at slab rate of Individual where as tax is deducted at source @ 30%+edu.cess.

However, any deposit made to the NRE account is tax free in India but would participate the taxation in your host country (country where you live outside of India). In other words, both the principle amount and the interest earned on the same is not subject to tax.

3. Repatriation

This is another important area of difference between NRO and NRE accounts. NRO accounts come with limited repatriation features. You can remit the interest freely. However, there are restrictions when it comes to remittance of the principle amount. You can remit a maximum of up to USD 1 million from your NRO account every year, only after you have paid all the applicable taxes.

On the other hand, funds from the NRE account are freely repatriable without any limits.

4. Transfer

An NRO account lets you transfer funds to another NRO account only. You cannot transfer funds from a NRO account to a NRE account. However, you can transfer money from a NRE account to another NRE account and also to a NRO account.

5. Currency risk

NRO accounts are not subject to any currency risk. NRE accounts, on the other hand, can be affected by the fluctuation of the India rupee against a foreign currency at the time of money transfer.

Quick Facts

Every public sector, private sector commercial banks are covered under Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India (RBI).

Each depositor in a bank is insured upto a maximum of ₹ 5,00,000 for both principal and interest amount held by the depositor.

How to choose the right account

An NRO account can be jointly held by two NRIs or with an Indian resident who is a close relative. A NRO account serves two main purposes- one is to deposit any income that arises in India whether it be rental income, income from dividends and so on. It can also be used to make any payments that you need to make in India.

However, NRO account is not suitable if you want to send money out of India.

An NRE account on the other hand can be opened jointly only with an NRI. It works for you if you want to be able to send your foreign earnings to India and have it back when required without any restrictions. You can link your NRE account with a trading and investment account and invest money in India or even keep your money in NRE deposits. You can also authorise a person in India to operate the account on your behalf. One can also make bill payments in India through the NRE account.

Conclusion

At times, you need both the accounts to operate your assets and convenience of free money movements across the borders or just one for your specific needs. Knowing about the NRO and NRE account and using them wisely will help you manage your finances in India from abroad. After all, it is your hard-earned money. Isn't it ?