As an Indian living abroad (Non-Resident Indian, or NRI), choosing between an NRE (Non-Resident External) account and an NRO (Non-Resident Ordinary) account depends on your financial goals, sources of income, and tax considerations. Let’s break down the differences and help you understand which option might suit you best:
1. NRE (Non-Resident External) Account
Key Features:
- Currency: Held in Indian Rupees (INR), but funded in foreign currency.
- Deposits: You can only deposit foreign currency (from abroad) into this account.
- Repatriation: Both the principal and interest earned are fully repatriable (you can transfer the money back to your foreign account without any restrictions).
- Interest Earnings: Interest earned is tax-free in India.
- Purpose: Ideal for parking income earned abroad in India.
- Risk of Exchange Rate: Deposits are subject to exchange rate fluctuations since the account is held in INR.
Best Suited for:
- NRIs earning income abroad and wanting to save or invest the money in India.
- If you need to transfer money freely between India and abroad, an NRE account is ideal.
2. NRO (Non-Resident Ordinary) Account
Key Features:
- Currency: Held in Indian Rupees (INR).
- Deposits: You can deposit both Indian and foreign income. This means you can deposit your local (Indian) income sources like rent, dividends, pension, etc., and your foreign earnings as well.
- Repatriation: You can repatriate up to $1 million per financial year (with proper documentation and payment of applicable taxes).
- Interest Earnings: Interest earned is taxable in India, typically at 30% (plus surcharge and cess).
- Purpose: Meant for managing income generated within India, such as rent from property, dividends, pensions, or other sources of Indian income.
Best Suited for:
- NRIs with income sources in India (like rent, dividends, or pension) that need a local Indian account to manage these funds.
- If you need to pay bills, loans, or manage any financial obligations in India.
Tax Implications for NRE vs. NRO Accounts
NRE Account: The interest earned on the account is exempt from Indian taxes. There is no tax deduction at source (TDS) on NRE interest.
NRO Account: The interest earned on an NRO account is taxable in India. Tax Deducted at Source (TDS) is applicable at the rate of 30% on interest earned (plus applicable cess and surcharge).
Which Account Should You Choose?
If your income is solely from abroad: An NRE account is the best option because:
- It's tax-free in India.
- You can freely repatriate both principal and interest.
- It allows you to easily manage funds you transfer from abroad.
If you have income sources in India (e.g., rent from property, dividends, or other investments): You’ll need an NRO account to handle this income because:
- You can deposit Indian earnings (NRE accounts only accept foreign income).
- While the interest is taxable, it’s the appropriate account for managing Indian earnings.
Can You Have Both NRE and NRO Accounts?
Yes, you can and should have both if you:
- Earn income both abroad (for which an NRE account is ideal) and within India (which requires an NRO account).
Having both accounts allows you to:
- Keep your foreign earnings separate from Indian income.
- Enjoy tax benefits on your foreign income (NRE) and comply with tax laws for Indian income (NRO).
Key Considerations:
Use an NRE account for foreign income: For income like your salary abroad or business income outside India, an NRE account is more tax-efficient and allows you to repatriate money easily.
Use an NRO account for income from India: For rent, interest, or dividend income earned in India, an NRO account will allow you to manage those funds while complying with Indian tax regulations.
Summary: NRE vs. NRO
| Feature | NRE Account | NRO Account |
|---|---|---|
| Currency | Indian Rupees (from foreign currency deposits) | Indian Rupees |
| Deposits | Only foreign income | Both foreign and Indian income |
| Taxation | Interest is tax-free in India | Interest is taxed at 30% (plus surcharge/cess) |
| Repatriation | Freely repatriable (both principal and interest) | Limited repatriation (up to $1 million/year) |
| Purpose | Savings and investments of foreign income | Managing income earned in India |
Final Recommendation:
- Open an NRE account if your income is mainly from abroad and you don’t have significant sources of income in India.
- Open both NRE and NRO accounts if you have Indian income sources like rental income, dividends, or pensions while earning from abroad.
Having both accounts gives you flexibility, maximizes tax efficiency, and allows you to manage both your international and Indian earnings effectively.