NRIs, often need to maintain bank accounts in India for various reasons. As an NRI, you may require bank accounts to receive their income generated in India or may want to invest your money earned abroad in India.
Once you become an NRI, it is actually illegal to hold Resident bank accounts. You have to contact your bank and convert all your existing bank accounts to non-resident Rupee accounts.
There are 2 types of non-Resident Rupee accounts in India:
- NRE (Non-Resident External)
- NRO (Non-Resident Ordinary)
But how do you decide which one should you open? Let’s understand more about these accounts.
What are Non-Resident Rupee accounts?
These are Indian Rupee accounts meant exclusively for NRIs. Most Indian public sector and private banks have the facility to open these accounts.
You can open these accounts as Savings, Current, or Deposit accounts.
You are allowed to open an NRE account after you qualify as an NRI for tax purposes i.e.
If he is in India for 182 days or more during the previous year;
If he is in India for 60 days or more during the previous year and 365 days or more during 4 years immediately preceding that year.
Your existing Resident accounts can be converted into NRO account once you become an NRI. It is your duty to intimate the change in your tax status to the bank.
How different are NRE and NRO accounts?
You need to understand that the NRE and NRO accounts are as different as chalk and cheese, and serve a different purpose altogether. These two accounts are designed so that you can segregate your earnings abroad and in India, with easier compliance to tax laws and FEMA (Foreign Exchange Management Act) regulations.
You should choose the right one, according to your financial needs.
Let us understand the differences between NRE and NRO accounts in various parameters.
1. Deposit of Funds: You can deposit funds earned abroad in both NRE and NRO accounts. However, all your income generated in India should be deposited in NRO accounts only.
You are also not allowed to deposit money into anyone else’s NRE account.
2. Repatriation: Repatriation means sending from, and bringing back money to an NRI’s country of residence.
You can repatriate any amount from your NRE account to any account outside India in any currency of your choice.
However, for an NRO account, the Reserve Bank of India (RBI) has a restriction of USD 1 million only to your resident country in a financial year (Apr-Mar).
3. Taxability: Taxation is one area where NRE account scores over the NRO account.
Interest earned on your funds in NRE accounts is exempt from Income Tax. It is also exempt from gift tax and wealth tax as well.
However, you might still have to declare this income in the country of your residence and pay taxes if applicable.
NRO accounts are taxable and the tax laws applicable are similar to that of Resident accounts. Since these accounts are meant for income generated in India, income tax, wealth tax, and gift taxes are applicable. Depending on the tax bracket your Indian income falls into, the tax rate could be as high as 30.2%.
You might have to declare this income in the country of your residence. If India has a DTAA (Dual Taxation Avoidance Agreement) with your country of residence, you can claim relief from double taxation.
4. Fund Transfer between accounts: You can transfer funds from an NRE account to another NRE account or an NRO account or a Resident savings account.
You can transfer funds from an NRO account to another NRO account and Resident savings account, but not to an NRE account.
5. Account Holding: You can open a joint NRE account with another NRI but not a Resident Indian.
You are permitted to open a joint NRO account with another NRI or a Resident Indian.
6. Currency Option for Deposit: You can deposit in cash to an NRE account in any foreign currency but deposit in Indian Rupees is not allowed.
You can deposit foreign currency or Indian Rupees into your NRO account. However, deposits above USD 5000 should be supported by currency declaration.
7. Motive: The motive of the NRE account is to transfer funds earned abroad to India, on a repatriable basis. It can be held or routed to other investments in India.
NRO account is meant to hold income generated in India such as rental income, interest income, pension income, etc. There are restrictions from RBI on repatriation from this account.
8. Exchange Rate Fluctuation: NRE accounts are exposed to two kinds of exchange loss:
- Conversion loss
- Daily fluctuation in the value of Indian Rupee
However, NRO accounts are always secure from currency fluctuations.
Should you open an NRE or NRO account?
Well, you should choose the right account based on your financial needs. Both these accounts serve a different purpose. Here are some tips for you to choose the right account:
Opt for an NRE account if:
- You want to remit your overseas earnings and hold them in Indian Rupees.
- You plan to make repatriable investments in Indian markets.
- You want to open a joint account with another NRI.
- You want an account that allows free repatriation to any currency.
- You foresee repatriation of more than 1 million USD.
Opt for an NRO account if:
- You need an account to receive your income in India.
- You want to hold your Indian earnings in Indian Rupees and have no plan to use the same in your country of residence.
- You want to open a joint account with a Resident Indian.
- You want your Indian earnings to be easily accessible to your family back home through a joint account.
Can I hold both NRE and NRO account?
Yes, you can open both NRE and NRO accounts to meet your needs. Use an NRO account if you have any income arising in India, and use an NRE account if you want to park your earnings abroad in India.
Both NRE and NRO accounts have different features to fulfill your various needs of NRIs. They offer great convenience to park your money earned abroad, to benefit from tax sops, and for easy repatriation. You should make the right choice depending on your financial needs.
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