NRE vs NRO Accounts: Key Differences in Taxation, Repatriation, and Interest Rates

Should you open an NRE, an NRO, or both? What are the distinct purposes of each account, and why might it be essential for NRIs to have both? The NRE vs NRO account debate often arises because both accounts are for different types of income: one for foreign earnings and the other for income generated in India. An NRE account provides the benefit of tax-free interest and full repatriation, whereas an NRO account is subject to tax implications and has repatriation limits. This guide explains the key features of each account type, including tax implications and repatriation rules, to help you select the NRE vs NRO account that best suits your financial needs.

NRE Account

An NRE (Non-Resident External) account is a special savings account offered by Indian banks to Non-Resident Indians (NRIs). It allows NRIs to park their income earned outside India in Indian Rupees (INR).

• Eligibility Criteria
  • Must be an NRI, PIO (Person of Indian Origin), or OCI (Overseas Citizen of India). 
  • The applicant should have a valid passport and visa. 
  • The income earned should be earned in foreign currency only. 
• Purpose
  • It provides a safe and convenient way for NRIs to manage their foreign earnings in India.
  • Enables NRIs to earn interest on their savings in INR.
  • Facilitates investments in India using foreign income.
• Benefits
  • Tax-free interest income: The interest earned on an NRE account is exempt from Indian income tax.
  • Full repatriation of funds: NRIs can freely transfer the principal amount deposited and the interest earned back to their overseas accounts without any restrictions.
  • Suitable for holding foreign earnings: NRE accounts are ideal for NRIs who want to keep their foreign income separate from their Indian income and avoid any tax implications.
• Limitations
  • Deposit restrictions: Only funds earned abroad can be deposited into an NRE account. Income generated in India, like rent or pension, cannot be deposited here.
  • Potentially lower interest rates: NRE accounts may offer slightly lower interest rates compared to NRO (Non-Resident Ordinary) accounts.

NRO Account

An NRO (Non-Resident Ordinary) account is a type of bank account offered explicitly in India for Non-Resident Indians (NRIs). It complements the NRE account by catering to a different need.

• Eligibility Criteria
  • Must be an NRI, PIO or OCI. 
  • Can also be jointly held with a resident Indian. 
  • Income credited to the account can be both foreign earnings and Indian income.
• Purpose
  • Enables NRIs to manage their income generated within India, such as rent from property, pension payments, dividends from Indian investments, or the sale of assets in India.
  • Provides a platform to hold and manage these earnings in Indian Rupees (INR).
  • Allows NRIs to make payments within India using their NRO account funds.
• Benefits
  • NRO accounts are crucial for NRIs with income streams originating in India.
  • NRO accounts often offer higher interest rates compared to NRE accounts.
• Limitations
  • Taxable interest: Interest earned on the NRO account is subject to tax deductions at source (TDS) by the bank according to Indian tax regulations.
  • Repatriation restrictions: Unlike NRE accounts, there are limitations on repatriating funds from an NRO account. NRIs can typically repatriate up to $1 million per financial year after paying applicable taxes on the principal amount being transferred.

Difference Between NRE and NRO Bank Account

Most people living abroad often choose an NRI or NRO account when it comes to managing their finances. Below is the difference between the NRE and the NRO account : 

Choosing Between NRE and NRO Accounts

Choosing between an NRE and an NRO account depends on your specific financial needs as an NRI. Here's a breakdown of the key factors to consider:

1. Source of Income

• Foreign Income: If your primary income is earned abroad, an NRE account is ideal. It allows you to deposit and hold your foreign earnings in INR without any tax implications on the interest income.
• Indian Income: If your income is generated within India (rent, pension, etc.), you'll need an NRO account. This account facilitates managing your Indian earnings in INR.

2. Repatriation Requirements

• Need for easy transfer abroad: If you need to freely transfer your funds back to your overseas account, choose an NRE account. It offers unrestricted repatriation of both the principal amount and the interest earned.
• Limited repatriation needs: If you don't expect to repatriate large amounts of money abroad frequently, an NRO account might suffice. You can still repatriate up to $1 million per year after paying taxes on the transferred amount.

3. Tax Implications

• Tax-free interest income: If minimising taxes on your savings interest is a priority, an NRE account is the way to go. The interest earned on this account is exempt from Indian income tax.
• Taxable interest income: If you are comfortable paying taxes on the interest earned, an NRO account may be a better option due to the potentially higher interest rates offered.

NRE vs NRO Fixed Deposit

Fixed Deposits (FDs) are investment products offered by banks where you deposit a sum of money for a fixed tenure at a predetermined interest rate. They are a low-risk way to earn returns on your savings.Now, for Non-Resident Indians (NRIs), there are two main types of bank accounts - NRE and NRO - and each can hold FDs:

• NRE FDs: These are for deposits originating from foreign earnings and converted into rupees. The key benefit is that they are tax-free in India. You don't pay tax on the principal amount or the interest earned. Additionally, NRE FDs allow for full repatriation, meaning you can transfer both the principal amount and the interest earned back to your foreign account.
• NRO FDs: These are for deposits of income generated within India, like rent, pension, or dividends. Interest earned on NRO FDs is taxed in India at around 30%. However, you can only repatriate the interest earned, not the principal amount.

NRE vs NRO Interest Rates

Interest rates on both NRE and NRO accounts are influenced by several factors:

• General economic conditions: Interest rates tend to be higher during periods of economic growth and lower during recessions. This is because banks can generally afford to offer more attractive rates to attract deposits when the economy is doing well.
• Creditworthiness of the borrower: In the case of NRO accounts, which are technically loans to the bank by the depositor, the bank will consider the perceived risk of the depositor. Accounts with a higher risk of default will typically have lower interest rates.
• Deposit term: For both NRE and NRO deposits, interest rates are usually higher for deposits with longer terms. Banks can offer better rates for longer deposits because they can rely on having access to the funds for a longer period.
• Bank's internal policies: Banks may offer different interest rates on NRE and NRO accounts based on their marketing strategies and funding needs. For example, a bank might offer higher rates on NRE accounts if they are looking to attract more deposits from non-resident Indians.

Potential Differences in Average Rates

While both NRE and NRO accounts are influenced by the same factors, there is a possibility that NRE accounts may have slightly lower average interest rates than NRO accounts. This is because banks may perceive NRO deposits to be a slightly higher risk, as the depositor is resident outside of India. However, the difference in rates is usually quite small.

It's important to shop around and compare rates from different banks before opening an NRE or NRO account. You can also consider factors such as the minimum deposit requirement and any fees associated with the account.

NRE vs NRO for NRIs Returning to India

For Non-Resident Indians (NRIs) returning to India, understanding the NRE account vs the NRO account is important. Both accounts serve different purposes and are regulated by RBI guidelines . 

• Once you return and become a resident, as per FEMA, you cannot continue to hold NRE/NRO accounts as you did before.
• NRE accounts lose their benefits once you become a resident.
• The account must be re-designated into a Resident Rupee account. NRO accounts also need to be converted to a Resident Rupee account after your return.
• There will be no tax-free interest benefit after your residential status changes.
• Income from Indian sources will then continue to flow into the new resident account.
• As an NRI, NRE allows free repatriation, while NRO has limits.
• Standard resident rules apply after becoming a resident, and repatriation facilities under these accounts cease.
• Interest earned on NRE accounts is exempt only while you are an NRI.

NRE Account vs NRI Account

NRE is indeed a type of NRI account. An NRE (Non-Resident External) account is a specific type of bank account in India designed for Non-Resident Indians (NRIs) to deposit their earnings that are generated outside of India. These earnings can be in any form, like salary, pension, or business income. The main benefit of an NRE account is that the interest earned on the account is tax-free in India, and the entire amount (principal and interest) can be freely repatriated abroad. However, transfers between NRE and NRO accounts within the same bank are usually permitted, but tax implications might apply.

However, there are other account options available for NRIs depending on their needs:

• NRO (Non-Resident Ordinary) account: This account is used to deposit funds that originated in India, such as rental income, pensions, or interest on investments in India. Unlike NRE accounts, interest earned on NRO accounts is taxable in India.

There are also accounts for NRIs that deal specifically in foreign currency:

• FCNR (Foreign Currency Non-Resident) account: This account allows NRIs to deposit foreign currency and earn interest on it. The interest rates on FCNR accounts are typically higher than those on NRE accounts.

Note: It's also advisable to consult with a financial advisor specialising in NRI finances to make an informed decision based on your unique financial situation and goals or contact NoBroker for legal advice.

How NoBroker Can Help?

Choosing between an NRE vs NRO account depends on your residency status and purpose for holding the account. NRE accounts are better suited for NRIs who earn foreign income, whereas NRO accounts are ideal for managing income earned in India. Still confused about the NRE vs NRO account? NoBroker NRI services act as a one-stop shop for NRIs managing their Indian properties and finances, offering a convenient and hassle-free experience. With our expertise and support, your financial transition can be smooth and hassle-free. Reach out to NoBroker today!