NRO vs NRE Account – Which one is better?

An NRE account is a bank account opened in India in the name of an NRI, to park his foreign earnings. NRE Account stands for Non-Resident External Account. An NRO account is a bank account opened in India in the name of an NRI, to manage the income earned by him in India. These incomes include rent, dividends, pensions, interest, etc. Both accounts are opened in India for an NRI person. However, there are other major differences. We will be discussing in this article NRO vs NRE Account in detail for your easy understanding.

Major Differences: NRE vs NRO Accounts.

The very basic difference between these two accounts is what they stand for. NRE Account stands for Non-Resident External Account whereas NRO Account stands for Non-Resident Ordinary Account. Both of these account function as savings account for a person who has foreign income in his/her total income.

The following are the major differences:

NRO vs NRE Account – Purpose:

NRIs are people who live are Indian citizen but resides abroad and therefore earn in foreign currency. But also, they might need to send it to India. Now comes the role of the NRE Account.

NRE Account is a bank account for NRIs to transfer their foreign earnings to India.

However, it is not binding that an NRI can only earn outside India. S/He can also have income earned in India. Here is when an NRO Account comes in handy.

NRO Account is a bank account of an NRI person to manage the income earned in India by him.

NRO vs NRE Account – Taxability:

The taxability of income under these account is crucial to know.

NRE Account is fully exempt from tax. Neither the balance nor the interest earned on these accounts is taxable. However, the Interest amount of an NRO Account is taxable at a flat 30% under the Income Tax Act, of 1961.

Basically, the income earned abroad is parked in NRE Account and is not taxable in India and hence is fully exempt from tax in India. And income earned in India is taxable under specified income head & rate and interest earned on that deposited income in NRO Account are taxable at 30% in India.

NRO vs NRE Account – Repatriability:

The next big question after taxability is whether the amount under both accounts are repatriable or not. Repatriation means transferability.

The principle amount in an NRE account and the interest accumulated thereon is open to repatriation. That means both portions of the amount are allowed to be transferred to a foreign account.

In the case of an NRO account, the interest amount can be repatriated fully, however, in the case of the principle amount, you can remit only up to USD 1 million in a financial year.

Joint Accounts:

An NRI can open a joint NRO account with one or more NRIs or Indian citizens. But there can be a joint NRE account only with another NRI. In other words, NRO Account can be opened in joint with anyone who is an Indian citizen since the income deposited in it is earned in India.

Deposits & Withdrawals:

Since NRE Account is for the income earned outside India, therefore, domestic income can not be deposited into this account. Domestic income is to be deposited into NRO Account only. However, foreign income can be deposited into both accounts.

Coming to withdrawals, it is allowed to withdraw the amount from both accounts but only in INR.

Exchange Rate Risk:

Since NRE Account is an account to park foreign income, it is prone to exchange rate fluctuations. NRO Account will not face any exchange rate risk if withdrawals are made in INR.

If your total income includes income earned in India and you want to manage it within the country, you can opt for an NRO account. An NRE account can be opened if you want to transfer your foreign income to India and want to avoid taxation liabilities. They are both a variation of savings accounts.