NRE vs NRO
Persons with NRI status (Non Resident Indians) can choose between two options when opening a bank account in India, which is an NRE or an NRO account. Any NRI interested in opening a bank account at an Indian bank could use the knowledge about the variance between these two account types. The most basic use of these accounts is for money repatriation from the individual’s overseas bank.
A NRE account is a Non-Resident External bank account denominated in rupees. It could be a savings, current or a fixed deposit account, and is opened by depositing money (foreign currency) at time of opening. This can be done in notes, or by using traveler’s checks. Funds in this account can be feely sent to another country.
A Non-Resident Ordinary account (NRO) is the usual bank account, but opened by an Indian national who intends to become a Non Resident Indian (NRI) while abroad. This account will accord most of the services offered by the NRE account, but any repatriation carried out through this account should be filed to the RBI by filling in the necessary paperwork.
Opening the account
A NRE account may be opened individually, or jointly with another NRI, without any approval provided the funds are transferred in a freely convertible currency. A NRO account however, can also be jointly opened for rupee transactions without approval, but a joint account can be opened by a NRI with a resident.
Which funds can be held and withdrawn from either account?
Overseas remittances or local funds belonging to a NRI that would be sent to him can instead be credited to his NRE, or funds could be transferred from another NRE account maintained in India. NRE accounts allow only foreign currency deposits, and not rupees, although rupee withdrawals are permissible from this account.
The NRO will hold funds that are not eligible to be sent abroad. However, an NRO account permits both foreign currency and rupee deposits, but withdrawals are only in rupees.
Taxes on interest earned
Interest earned on a NRO account, as well as on the credit balances of this account, is taxed based on the account holder’s tax bracket. However, the interest accrued on a NRE account is wholly exempted from income tax, as well as wealth tax that would otherwise be charged on the credit balances of the account. Also, cash gifts to this account do not attract taxes.
Transfers
Funds can be transferred from a NRE to a NRO account, but funds transfer from a NRO to a NRE is not permissible. Once a transfer to a NRO from a NRE account has been made, the funds are considered as non-repatriation, and as such, they cannot be transferred back.
Summary:
A NRE is Non-Resident External account, while a NRO is Non Resident Ordinary account; both options are available for NRIs.
A NRE account can be jointly opened by two NRIs, while a joint NRO needs one NRI and a resident.
A NRE allows only foreign currency deposits and rupee withdrawals, while a NRO allows both foreign currency and rupee deposits, but only rupee withdrawals.
A NRO account earns taxable interest, while interest and credit balances on a NRE account are not taxed at all.
A NRE to NRO funds transfer is possible, while a NRO to NRE transfer is not permissible.