Compare NRE vs NRO accounts for NRIs. Learn the key differences in taxation, repatriation, and income sources to choose the right savings account for you.
DBS Bank
As an NRI, when it comes to managing your earnings and finances, you have two types of NRI savings accounts to choose from- Non-Resident External (NRE) account and Non-Resident Ordinary (NRO) account. In this article, we will compare NRE account vs NRO account and determine which is the right bank account for you.
Why NRIs Need Specialized Bank Accounts in India
An NRI savings account is helpful in supporting families and managing finances from abroad. Choosing the right type of account is important, as each account has a different purpose. It’s important to choose one that makes sending money to India easy and quick. At the same time also offers digital banking solutions to make personal finances hassle-free for NRIs.
What is an NRE Account?
An NRE (Non-Resident External) account allows NRIs to transfer their overseas earnings to India. Deposits are made in foreign currency and converted into Indian Rupees (INR) at the time of credit. The interest earned on this account is fully exempt from income tax in India.
Example:
If you work abroad and receive your salary in a foreign currency, you can transfer part of it to your NRE account in India. The money will be converted into INR, and you can freely repatriate it back to your country of residence whenever needed. The interest you earn on this account will not be taxed in India.
What is an NRO Account?
An NRO (Non-Resident Ordinary) account helps NRIs manage income generated in India while they are abroad. It can accept deposits in both Indian and foreign currency, but all balances are maintained in INR. The interest earned on this account is taxable in India.
Example:
If you own property in India and earn rental income, the rent can be deposited directly into your NRO account. Similarly, any dividends from your Indian mutual fund investments will also be credited here. However, the interest you earn on this account will be subject to income tax in India.
Key Differences Between NRE and NRO Accounts
Though both account types are designed for NRIs, the way they handle funds, taxation, and access differs significantly. Here are the key differences between NRE and NRO accounts.
Source of Funds
- NRE Account: This account is designed to handle foreign exchange earnings received overseas.
- NRO Account: Can be used for income deposit from both abroad and India.
Tax Deducted at Source (TDS)
- NRE Account: Any interest earned is exempt from Indian income tax.
- NRO Account: TDS is applicable in India for interest earned in this account.
Repatriability of Funds
- NRE Account: There are no restrictions on the repatriation of principal and interest.
- NRO Account: Repatriation is capped at USD 1 million per financial year, subject to documentation and compliance.
Currency and Exchange Rate Factors
- NRE Account: The funds are maintained in Indian Rupees regardless of the foreign currency deposited, which makes it prone to exchange rate fluctuations.
- NRO Account: Deposits are accepted in both foreign and Indian currency; however, the amount is maintained in Indian rupees.
Joint Account Holder Restrictions
- NRE Account: Only another NRI may be held jointly.
- NRO Account: Can be jointly held with either an NRI or a resident Indian.
Factors to Consider Before Choosing an NRI Account
If you are planning to open either NRE or NRO account consider these key factors to consider which NRI savings account would be correct as per your needs.
Your Income Sources
If the majority of your income is earned outside of India, choose an NRE account; if you also have sources of income in India, choose an NRO account.
Future Financial Goals
An NRE account is better suited for managing Indian expenses and local obligations if your objective is the simple repatriation of funds.
Tax Planning
While NRO accounts necessitate preparation for TDS deductions, NRE accounts offer tax-free interest. Before making a choice, think about your total tax obligations.
Documentation Checklist for opening an NRI Account
Before you open an NRI Account, it’s essential to ensure that you have the documents that are required by banks to complete the Know Your Customer (KYC) without any hiccups. Here’s a quick checklist:
1. Proof of Identity: Valid passport (photocopy of important pages)
2. Proof of NRI Status: Work permit, valid visa, residence permit, or overseas resident card.
3. Foreign address proof: Utility bill, rental agreement, driving license, or bank statement from your country of residence.
4. Proof of Indian Origin: Overseas Citizens of India (OCI) card or Person of Indian Origin (PIO) card.
Some banks might also require documents such as a FATCA/CRS declaration for tax compliance, income proof or tax return, and a cancelled cheque of your overseas bank account.
Conclusion
Managing finances across borders becomes simpler with an NRI account, but since each account type serves a different purpose, choosing the right one is essential. When comparing NRE vs NRO accounts, consider factors such as the source of income, taxation rules, and repatriation flexibility. Depending on your needs, you may also maintain both types of accounts to manage your overseas and Indian income more effectively.
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