What are NRE & NRO Account?
The movement of people is a hallmark of the globalised world. People migrate to other countries in the search for better opportunities and contribute to their home country through remittances. Indians are one of the biggest expat communities in the world, working and living in multiple countries. At the end of 2018, over 31 million Non-Resident Indians and People of Indian Origin were estimated to be residing outside the country. Indians living outside the country remit billions of dollars every year back to the country. In 2018, Indians sent back $79 billion in remittances, which was highest among all countries.
As per the law, Indians working and earning in a foreign country are not allowed to transact through a normal savings account. A mechanism has been put into place to facilitate transactions of people living outside India. If you are an NRI or PIO earning in a foreign country and want to send the money back to India or save it in an Indian account, you will have to open an NRE or an NRO account.
NRE Account
Both the accounts have the same purpose—to help NRIs transact in India—but have different terms and conditions. An NRE or Non-Resident External account is used to keep money earned in foreign currency in a rupee denomination. The money deposited in an NRE account is converted into Indian currency at the time of deposit. Since NRE accounts provide conversion facilities, you can deposit money in any currency and withdraw it in Indian rupees. NRE accounts are available in various formats based on the requirement of the account holder. You can open savings, current, recurring, or a fixed deposit NRE account.
NRE accounts can be opened jointly, but the joint account holder should also be an NRI. A key point to focus on while opening an NRE account is that the deposits are exposed to currency fluctuations. For instance, you deposit $ 1000 on January 2, 2019. On the date, INR was trading at 69.99 against the dollar, so Rs 69,990 will be deposited in your NRE account. Now, suppose you choose to transfer the same amount a year later to your foreign account. On Jan 2, 2020, the INR was trading at Rs 71.33 against the dollar, so, you will get just $ 981 back. The situation changes if the INR strengthens against the dollar instead of weakening. The NRE account doesn’t provide any protection against currency fluctuations.
Though NRE account deposits are exposed to currency fluctuations, they provide a host of benefits. The interest earned on the deposit in an NRE account is tax-exempt, which makes the interest as well as the principal amount tax-free. Depositors are free to fully repatriate any amount deposited in an NRE account. You can transfer the principal and the interest earned on it to any account outside India without any restrictions. An NRE account can be utilized for personal uses as well as for business purposes in India.
NRO Account
An NRE account is ideal for people who have only foreign income. But what if you also have income sources in India? You are not allowed to deposit money earned in India in the NRE account as it would lead to a tax-free transfer of money outside the country. To avoid the situation, the government has set up the NRE and NRO account mechanism. The Non-Resident Ordinary account or the NRO account is used to manage the income earned in India like dividends, rental income, pension, etc.
Just like an NRE account, you can also deposit foreign currency funds in the NRO account, but cannot withdraw in the foreign currency. A major difference between NRO and NRE accounts is the currency of withdrawal. An NRO account doesn’t allow the transferability of funds without restrictions. You can open a joint NRO account and it is not mandatory to have an NRI joint holder. Unlike an NRE account, the interest earned on the deposits in an NRO account is taxable at 30%, deductible at the source. The NRO doesn’t allow free repairability of funds and you can send up to $1 million in a year after paying the applicable taxes. The NRO account is ideal for people who have any Indian source of income.
How NRIs Invest in India?
The Indian government promotes investment from NRIs, but any capital coming from outside the country comes under the ambit of the Foreign Exchange Management Act (FEMA). NRIs have to follow the rules prescribed under FEMA while investing in India. As per the law, NRIs are allowed to invest in a host of assets like stocks, mutual funds, and real estate. To access the capital markets, NRIs can either opt for the Portfolio Investment Scheme or the Direct Subscription Route.
The Portfolio Investment Scheme introduced by the Reserve Bank of India is the primary mode of investment for NRIs in the stock market of India. Through the scheme, NRIs can buy/sell stocks, debentures, and other securities allowed by the RBI in India through a recognized stockbroker. The request for the portfolio investment scheme has to be routed through the designated branches of specified banks. NRIs have to choose between NRO NRE accounts while investing depending on the nature of the investment—repatriable or non-repatriable.
How do these Accounts Operate?
Even though there are certain differences between NRO and NRE accounts, their operation is similar. The choice between the NRE and NRO accounts depends on the requirements of the NRI. The question of choosing between NRE and NRO account arises when opting for a repatriable or non-repatriable investment. While investing in a financial product in India like mutual funds, NRIs have to indicate the method of investment.
If the payment method is repatriable, you have to opt for an NRE account as NRE account deposits are fully repatriable. If the payment method is non-repatriable, you have to choose an NRO account. During redemption of the investments, if the investment is not tax-exempt, the tax is deducted at source. If you want to repatriate the amount out of India after redemption, you should opt for NRE account before investing. NRIs have to maintain complete transparency while investing in India. The facility of redemption of capital invested and earned from India is only available to NRIs, and so, NRIs have to provide their overseas address while filling the NRI banking form.
What are the differences between NRE and NRO Accounts?
The major differences between NRO and NRE accounts pertain to repatriation, taxability, fund deposit and withdrawal and transferability.
| NRE | NRO | |
|---|---|---|
| Repatriability | The deposits in an NRE account along with the interest earned is fully repatriable. | There are restrictions on repatriation from NRO accounts. You can repatriate just $1 million in a year from an NRO account and that too with the help of a chartered accountant. |
| Taxation | Taxability of funds is a major difference between NRE and NRO. The interest earned on deposits in an NRE account is tax-exempt. | The income from an NRO account is taxed. NRIs can, however, reduce their tax liability in India by availing tax benefits under the Double Taxation Avoidance Agreement with certain countries. |
| Deposit rules | The deposit rules for NRE and NRO accounts are different. You can deposit any amount in a foreign currency in both the NRE and NRO accounts. | INR-denominated funds originating in India can only be deposited in the NRO account. |
| Fund Transfer | You can transfer funds from an NRE account to another NRE account as well as NRO account. | Funds from an NRO account cannot be transferred to an NRE account. |
| Joint account | The rules for the opening of a joint account are different for both NRE and NRO accounts. You cannot open a joint NRE account with a resident Indian. The joint account holder for NRE accounts has to be an NRI. | An NRO account doesn’t have any restrictions. You can open an NRO account with a resident Indian as the joint account holder. |
| Currency fluctuations | The deposits in an NRE account are exposed to exchange rate fluctuations as well as conversion loss. | NRO account deposits are not exposed to daily currency fluctuations. |
How do I choose which account I need to open for myself?
Both the NRE and NRO accounts serve different purposes. An NRE account allows easy repatriability and is primarily used to transfer income earned in foreign currency and maintain it in Indian currency. It can be used for savings or business purposes but becomes useless in the case of income from India. The NRO account is used to maintain funds generated from income sources in India like financial market investments and real estate investments.
If you have a source of income in India, you should opt for an NRO account as an NRE account will not serve your purpose. But if you just want to convert a part of foreign earnings into savings denominated in the Indian currency, the NRE account would be an ideal choice. The deposits in the NRE account will earn tax-free interest and there are no restrictions on repatriation.
India Infoline Tools and Platforms for NRIs to Trade & Invest in India
NRIs are allowed to invest in various asset classes in India, but the regulations can be confusing. India Infoline provides a host of tailor-made facilities for NRIs to trade and invest in India. It is important to choose a reputed financial institution with a proven track record to successfully invest in India. With India Infoline, NRIs get a wide variety of investment options in India. The company provides dedicated relationship managers to help NRIs at every step. One of the biggest NRI account benefits with India Infoline is that the account can be opened online through video verification.
India Infoline has designed various tools and platforms to ease the investment process for NRIs. Major NRI-focused tools are NRI Trading account, NRI Demat account, NRI Bank account and NRI custodial account. The NRI trading account is used for buying and selling of securities just like a regular trading account. The NRI demat account is used to store the securities bought through the trading account. Under the NRI bank account, NRIs can opt to open an NRE or NRO account as per their requirements. The NRI custodial account is meant for NRI who wish to trade in equity futures and options segment.
Conclusion
The Indian government provides a host of benefits to NRI investors. The labyrinth of rules and regulations should not stop you from accessing the Indian capital markets. With the variety of NRI investing tools offered by India Infoline, you can have a rewarding investing journey in India
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Frequently Asked Questions
Yes, those students who have gone overseas for higher education and continues to stay abroad can have a Non-Resident External (NRE) or a Non-Resident Ordinary (NRO) account.
List of documents required for opening an NRE and NRO account –
- Identity proof (Copy of PAN, passport)
- NRI status proof (Copy of visa, work permit, PIO, OCI)
- Proof of residence abroad
- Indian address proof
- Cancelled cheque
- PIS permission letter
To open an NRE or NRO account in India, the citizen needs to have lived outside India for 120 days or more. In addition to this, they have spent less than four years of the last 10 years living outside India.
Both NRE and NRO accounts serve varied purposes of an NRI. Thus, you must choose the one that best suits your financial needs. An NRE or Non-Resident External (NRE) account is a bank account opened by an NRI to deposit their foreign exchanges in India. On the other hand, a Non-Resident Ordinary (NRO) account can be used by NRIs to park the money earned in India. So, if you have an income source in India, go for an NRO account. While those who want to hold their overseas earnings in Indian currency, opt for an NRE account. Each stands mighty in its own terms.
Funds originating in India i.e. in Indian Rupees or INR can be deposited only in NRO Accounts and not an NRE Account. However, funds originating from a foreign country (foreign currency) can be deposited in both NRE and NRO accounts.
