17.5 million Indians live in foreign countries. According to the World Bank they collectively send money to India to the tune of $76 billion annually. However, NRIs cannot hold resident savings accounts in India. They must opt for either NRO or NRE accounts. Here is a look at how these 2 options work, key differences between them, and their applicability.
A nonresident Indian (NRI) is someone who lives in a foreign country for 183 days or more during a financial year. According to the provisions of the Foreign Exchange Management Act (FEMA) NRIs are not allowed to hold savings accounts in India. To bank in India NRIs have 2 options – A Non-Resident External Account (NRE) or a Non-Resident Ordinary Account (NRO).
Almost all large public and private sector banks in India can offer NRO accounts. They do this with authorization from the RBI under Section 10(1) of FEMA (1999). The State Bank of India (SBI) and Canara Bank are 2 PSU banks while Axis Bank and ICICI Bank are two private banks which offer NRO services. Note that resident Indians are not allowed to have solo NRO accounts. A resident Indian can hold an NRO account jointly with an NRI who is a close relative. 2 NRIs can also open an NRO account jointly.
The main purpose of an NRO account is to manage incomes earned in India. These can include interests, dividends, pensions, rents, and so on. NRIs can also use NRO accounts to deposit incomes earned overseas. An NRO account can be a current, savings, recurring, or fixed deposit account. Deposits can be in foreign currencies as well as in INR. However withdraws can only be in INR.
The interest earned on an NRO account is taxed at 30%. Account holders can transfer (remit) the interest to a foreign account without limit. However they can only remit the principle up to a limit of $1 million per financial year. There are no limitations on deposits. Account holders earn interest on their money in an NRO. SBI gives interest at 2.70% per annum depending on the account balance.
Almost all banks which offer NRO accounts also offer NREs. Only NRIs are allowed to hold NRE accounts. An NRI can hold an NRE jointly with another NRI (but not with a resident).
The main goal of an NRE is to manage overseas earnings. That means account holders can deposit all forms of their foreign income in an NRE, but none of the income earned in India. The deposited amount is automatically converted and maintained in INR. Deposits can be in any currency. Withdrawals can only be in INR. NRE can be a current, savings, fixed deposit, or recurring account.
NRE deposits are fully exempt from both income tax and wealth tax. This includes the principle and the interest earned. Moreover, unlike NRO, account holders can repatriate (transfer to a foreign account) both principle and interest in an NRE account without limit.
- NRO: NRI solo, NRI-resident (close relative) joint holding, or NRI-NRI joint holding
- NRE: NRI solo or NRI-NRI joint holding
- NRO: No limit on interest. Principle limited to $1 million per year
- NRE: No limit on interest and principle
- NRO: Interest earned is taxed at 30% (TDS)
- NRE: Interest and principle are fully tax-free
- NRO: Foreign and Indian incomes
- NRE: Foreign incomes only
- NRO: Only in INR
- NRE: Only in INR
Which one is right for me?
As a NRI one should get an NRO account if:
- You earn incomes in India and abroad
- You want to manage it in India
- You want a resident Indian to be a joint holder
Get an NRE account if:
- All your income is earned abroad
- You want to minimize the tax
- There is no resident joint account holder
Indian students studying abroad are treated as NRIs. They are eligible for NRO/NRE accounts. Educational loans will continue to be available under FEMA regulations. The recommended account type for students is NRO. A student can hold it jointly with a parent or sponsor, who is a resident Indian.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.