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What is the difference between an NRE and an NRO account?

Both these accounts basically serve the same purpose of allowing NRIs to transact in India. They are to be maintained in rupee terms and can be opened as a savings, current, recurring or fixed deposit. However, they differ in their offerings.

Moving to another country calls for a lot of preparation. You need to find a place to live, get started on the new job and address something as basic as opening a new bank account. Yes, when you change your residence and become an NRI, you can no longer use your savings account back home. It needs to be converted into an NRO account, as per foreign exchange guidelines. 

What exactly is an NRE or an NRO account?

Both these accounts basically serve the same purpose of allowing NRIs to transact in India. They are to be maintained in rupee terms and can be opened as a savings, current, recurring or fixed deposit. However, they differ in their offerings. 

Let’s understand NRE accounts first.

NRE Account

NRE is an acronym for Non-Residential (External) account and is essentially used to keep money earned abroad in rupee denomination. 

What is it used for

It is useful when NRIs have to fulfil financial obligations in India such as paying for family expenses and home EMIs or saving for retirement. Investment in mutual funds, stocks or bank FDs or buying real estate can also be made from this account.

It needs to be noted that the amount deposited in these accounts need to be made from the income earned outside India. So it is preferable to have an NRE account when you have only foreign income. 

How does one get it

You can either open a single or a joint account with a resident Indian (a close relative) in any of the Indian banks. 

Documents required for opening an account:

Passport photo

Photocopy of the following:

Pages of passport containing personal and other details

Valid work visa/work permit

PAN card or Form 60

In addition, address proofs in India or abroad will be required along with FATCA/CRS declaration.

Benefits

Principal and interest earned on these deposits are fully repatriable with absolutely no questions asked whatsoever. Moreover, interest earned on the NRE deposits is also tax-free. Money in an NRE account can also be easily transferred to your NRO account.

When you deposit money in foreign currency into your NRE account, it gets converted into Indian rupees at the time of opening a deposit. As an investor, you are subject to exchange rate fluctuations as well as conversion loss (its cost). Assume, you deposited $ 4,000 into your NRE account, when the exchange rate was Rs 75 for a dollar. And immediately you opened a one-year fixed deposit at 5.0 per cent worth Rs 3 lakh (on its conversion). At maturity, if the rupee appreciates to Rs 73 a dollar, your deposit in dollar terms would have yielded 7.9 per cent ($ 4,315) on its conversion. Any depreciation of rupee, in contrast, could also lower yields as compared to the coupon rate.

Many NRIs prefer investing in India from their foreign income. Tax-free fixed deposits are big motivators for opening an NRE account. 

NRO Account

NRO is an acronym for Non-Residential (Ordinary) account and is essentially used to manage your income in India. Funds can be easily sent and received within India from this account. However, rules are different with regard to repatriation. While principal and interest earned on NRE deposits are fully-repatriable, in case of NRO accounts only the interest is repatriable and overall remitting is limited to $ 1 mn in a financial year and subject to RBI regulation. Alternatively, you can also transfer money from your NRO to NRE account subject to the above limits and submission of more documents. In order to remit, you require a CA certificate (Form 15 CA and 15 CB) along with an undertaking by the remitter.

What is it used for

It is useful when you stay abroad and have income sources in India as well. For instance, you might have receipts back home in the form of dividends, interest or rent earned from your house property. 

Interest earned on such accounts is not tax-free and has a withholding tax rate of 30 per cent (along with 4% cess and applicable surcharge) which is deducted at source. However, you can reduce your tax liability in India by availing tax benefits under the Double Taxation Avoidance Agreement (DTAA) that India has with about 90 countries.

How does one get it

It needs to be noted that the amount deposited in these accounts needs to be made from your money in India. 

You can either open a single or a joint account with a resident Indian (a close relative) in any of the Indian banks. 

Usually, an existing local bank account is converted to an NRE account by sending a request letter mentioning the change of residential status. It is convenient to do so as in such cases the account number is preserved.

Benefits

It is easier to operate a single NRO account that takes care of your financial dealings at home. Moreover, it is also a simpler process to convert an existing savings account while being convenient to make payments and receive income/refunds in a single account.

 

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