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Non-Resident External (NRE) account is a bank account for NRIs to transfer their foreign currency earnings to India. This account is very liquid, and all deposits are fully and freely repatriable to the NRIs country of residence. Moreover, the interest amount from these accounts is completely tax-free in India. This article covers NRE accounts, its benefits, its similarities and differences with NRO accounts in detail.

What is an NRE Account?

A Non-Resident External (NRE) Account is a rupee denominated bank account that an NRI can open in India to deposit foreign currency earnings in India. They can be a savings account, current account, recurring deposits and fixed deposit accounts. These accounts can be opened individually or jointly. However, if one wishes to open a joint account, it is possible only with another NRI. These accounts are highly liquid, and NRIs can quickly and fully repatriate the money from these accounts to their country of residence. Moreover, the interest amount earned on this account is completely tax-free.

The deposits made into NRE accounts have to be earnings outside India. NRIs cannot deposit their domestic earnings (Indian income) in these accounts. Also, one can operate their account from anywhere in the world using net banking facilities. Moreover, the banks offer international debit cards so the account holder can transact and withdraw money.

These accounts facilitate investments in India. For example, NRIs who want to invest in mutual funds in India can do so using their NRE account. One can also use this account for carrying out investments, business, and personal banking in India.

These accounts are exposed to exchange rate fluctuations. This is because the NRI deposits money in foreign currency and takes back Indian rupee. Hence there is a chance that the NRI is withdrawing more or less than the initial deposit amount.

Why do you need to open an NRE Account?

According to the Foreign Exchange Management Act (FEMA) guidelines, an NRI cannot have a bank savings account in India. Hence NRIs who want to transact in India, need to open an Non Resident External account. Having this account in India will help NRIs to send the money earned outside India save them in Indian rupees.

Also, this account will allow NRIs to freely repatriate all their money back to their country of residence, which is not possible without this account. Moreover, it will enable an NRI to invest in India. Also, an authorised family member in India can easily access the funds available in the account. Hence, making it a viable option for NRIs who want to look after their family in India.

Eligibility criteria to open an NRE Account

Following is the eligibility criteria to open an NRE savings account:

  • Should be a Non-Resident Indian (NRI).
  • Indian citizen residing in a foreign country for studies, employment or business.
  • Individuals posted in UN organisations or officially deputed abroad by the Government of India or public sector undertaking.
  • Indian nations who are mariners or seafarers or employees of foreign airlines.
  • Person of Indian Origin or Overseas Citizen of India.
  • Has had an Indian passport at some point in time.
  • A parent or a grandparent was an Indian citizen under the Constitution of India or Indian Citizen Act 1955.
  • Spouse of an Indian citizen or spouse of PIO.

Benefits of NRE Account

An NRE account enables the account holder to deposit funds generated from a foreign country back to India. Following are the benefits of an this account:

  • The fund in the NRE savings account is completely repatriable. In other funds, one can freely move funds from India to other foreign accounts.
  • Interest earned from funds in the NRE account is not taxable in India. Also, the taxation of the funds is subject to the taxation rules of the country of residence.
  • NRE savings account is also maintained in India Rupees. The primary use of the account is for crediting funds transferred from an overseas account.
  • These accounts can be held jointly with another NRI.
  • Using the international debit card, one can withdraw their funds from this account at any time. 
  • These accounts can be used for personal and business purposes. It can also be used to make investments in India, such as in mutual funds.

What happens to the NRE account when you become a resident again?

When an NRI comes to India for a short visit, they can continue the account as an NRE savings account. However, if the NRI comes back to India for good, they are not allowed to maintain the NRE savings account. They will have to convert this account to a resident rupee account. In case the NRI wants to hold the money in foreign currency, they can convert it to Resident Foreign Currency (RFC) Account.

What is an NRO account?

A Non-Resident Ordinary (NRO) account is an account that helps non resident Indians manage the income that they earned in India. The interest, dividend, rents, etc. earned in India can be deposited in an NRO account. The account can receive deposits in the form of a foreign currency or Indian currency. However, the withdrawals happen only in Indian currency. Also, all the deposits in this account cannot be freely repatriated into foreign currency.

NRO accounts can be in the form of savings accounts, current accounts or fixed deposits accounts. Also, an NRI can open an NRO account jointly with a resident or a non-resident Indian. With the help of an NRO account, one can invest in mutual funds and other investment vehicles with ease. One can also get loans against NRO fixed deposits. The interest rate on such loans tends to be lower than regular loans.

NRO accounts facilitate the transfer of Indian income abroad. However, non resident Indians can transfer up to USD 1mn a year. Additionally, they will have to fill repatriation forms. Also, the depositor has to pay repatriation charges. However, during transfer, there are no currency exchange risks involved. 

Taxation

The interest income that one earns from NRO accounts is subject to TDS or tax deducted at source. And the interest income is added to the depositors’ income and is taxable at the respective income tax slab rate. Moreover, the account is subject to a gift tax and wealth tax.

The similarity between an NRE account and an NRO account

Following are the similarities of NRO account and NRE account:

  • Both NRE and NRO accounts are Indian Rupee NRI accounts.
  • The NRE and NRO account can be opened as either a savings account or a current account.
  • Account-holders have to maintain an average monthly balance of INR 75,000.

Difference between an NRE account and an NRO account

Following is the difference between NRO and NRE account

Basis of DifferenceNRE AccountNRO Account
DefinitionThese accounts are for depositing income earned outside India in India.These accounts are for depositing income earned in India.
RepatriabilityThe deposits and the interest earned on them are fully repatriable.There are no restrictions. One can transfer/ repatriate USD 1 million in a year from an NRO account with the help of a chartered accountant.
TaxationInterest earned on deposits is exempt from tax in India.The income from the NRO account is taxable. NRIs can reduce their tax liability by availing benefits under the Double Taxation Avoidance Agreement with a few countries.
Deposit and Withdrawal currencyCan deposit in foreign currency and withdraw in Indian Rupee.Deposits can be in Indian as well as foreign currency. However withdrawals in Indian currency.
Deposit RulesOne can deposit any amount in foreign currency.One can deposit any amount in foreign currency. Furthermore, rupee-denominated funds originating in India can be deposited only in NRO accounts.
Fund TransferOne can transfer funds from an NRE savings account to another NRE savings account and also NRO account.Funds from one NRO account can be transferred to another NRO account to the other. However, they cannot be transferred to another NRE savings account.
Joint AccountOne can open an account jointly only with an NRI. NRO account does not have any restrictions, and one can open it with a resident Indian.
Currency FluctuationsThe deposits are exposed to exchange rate fluctuations and also currency loss.The deposits are not exposed to currency fluctuations.

Frequently Asked Questions

Is money deposited in an NRE account taxable?

Deposits made in NRE savings account and interest income is exempt from tax in India. Also, there is no TDS, income tax, wealth tax, or gift tax in India.

Can we deposit Indian rupees in an NRE account?

No, one cannot deposit Indian rupees in an NRE savings account.

Is the NRE account taxable?

Interest from an NRE account is not taxable in India. Also, the account is completely tax-free in India. In other words, the account is not subject to TDS, income tax, gift tax, or wealth tax in India.

Is Aadhaar mandatory for an NRE account?

No, it is not mandatory to have an Aadhaar card to open an NRE account.

How long can you keep money in the NRE account?

There is no time restriction for holding money in an NRE account. However, suppose the NRI returns to India for good. In that case, they have to convert the account to a resident savings account. The reasonable period within which they can convert is three months. If the NRE account is not converted to a resident account within three months, it would be considered a FEMA violation.