Non-Resident Rupee (NRE) Account & Non-Resident

Taxation
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September 10, 2021

A Non-Resident Indian (NRI) whose earnings are from abroad and India often faces problems in managing the finance. They also find it hard to trace bank accounts in a different country, even when trying to repatriate/ defector money to their home account. NRE & NRO accounts help with this.

As per the Foreign Exchange Management Act (FEMA) instructions, a Non-Resident Indian (NRI) cannot have a savings account in India in the name of an NRI. Therefore, NRIs must convert all money earned from abroad (savings) to a Non-Resident External (NRE) Account or Non-Resident Ordinary (NRO) account. Therefore, using a savings account in the home country can bring heavy penalties on the account holder. Hence, opening an NRE or NRO account is a feasible option for NRIs. It can help NRIs in two ways:

They can send their foreign earnings to India at any point.
They can also employ their income from India (via any assets) in the home country itself.

Non-Resident External (NRE) Account

The Non-Residential External (NRE) account is an account that offers complete security and helps you park your foreign earnings in India, in the Indian denomination. These accounts can be in the form of savings, current, RD, or FD. The foreign currency you retain into the account is transformed into Indian rupees. You can transfer your funds to a foreign account from a Non-Residential External account without difficulties and restrictions. However, you need to note that the amount you deposit into Non-Residential External accounts must be earned outside India. The international debit card provided by the banks enables you to transact and withdraw money 24*7. A non-Residential External account is primarily used to carry out business, personal banking and make investments in India. The principal amount and interest accumulated thereon in an NRE account are open for repatriation.

Non-Resident Ordinary Rupee (NRO) Account

An NRO account is an Indian saving or current account held by Non-Resident Indian (NRI) to manage their income earned in India. The Non-Resident Ordinary Rupee account allows you to receive the fund in Indian or Foreign currency. This account can be opened by an NRI along with a resident citizen (a close relative) or another NRI. It is even viable to transfer funds from your current Non-Residential External (NRE) account. However, the interest you earn in this account is subject to Tax Deducted at Source (TDS) as per the provision of Income Tax Act, 1961.

How is a Non-Resident External Account different from a Non-Resident Ordinary Rupee?

Basis	NRE Account	NRO Account
Phrase	Non-Resident External Account	Non-Resident Ordinary Account
Meaning	It is an account of an NRI to convey foreign earnings/ Income to India	It is an account of an NRI to oversee the income earned in India
Taxability	Interest earned is tax-free in India	Interest earned and credit balance is subject to respective Income tax bracket, applicable wealth, and gift tax. However, account holders can avail of the tax benefit of the provisions of DTAA.
Repatriation	Can repatriate for both the principal and the interest amount	Can deport the interest amount freely, but the principle amount can be repatriated within the set limits along with a certificate from a Chartered Accountant
Joint account	It can be opened by two NRIs (both the parties are NRIs)	An NRI can open it along with an Indian citizen (a close relative) or another NRI

How a Non-Resident External Account is similar to a Non-Resident Ordinary Rupee Account?

Both Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts are Indian rupee accounts.The account holders have an option to open accounts as savings as well as current accounts.

Parameter	NRE accounts	NRO accounts
Deposits and withdrawals	Funds can be deposit in foreign currency but withdraw in Indian currency.	Funds can deposit in foreign as well as Indian currency but withdraw in Indian currency.
Transfer of fund	Funds can be transferred to another NRE account as well as to an NRO account.	Funds can transfer from an NRO to another NRO account, but the account holder cannot convey funds from an NRO account to an NRE account.
Effect of exchange rate variations	NRE accounts are subject to conversion loss of currency and rate variation in rupee value against a foreign currency.	There are no risks intricated in NRO accounts related to rate fluctuations.

If your total income includes income affirmed in India and you want to direct it, you can select for an NRO account. An NRE account can be opened if you want to relay your foreign income to India and avoid taxation liabilities.

At AJSH, we assist our clients in dealing with various income tax compliances, including income tax assessments, TDS returns, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about NRE & NRO account, kindly contact us.