All about NRE and NRO Account

As per the Foreign Exchange Management Act, 1999 (FEMA), A Non-Resident is an Indian Citizen who is a Resident Outside India. 

An Individual shall be a Resident Outside India if

  •   His stay in India in the preceding Financial Year is less than 182 days and
  •   He stays outside India for Business, Profession or Employment purposes or for any other purpose in such circumstances as would indicate his intention to stay outside India for an uncertain period.

Such Non Residents are provided with certain facilities under the FEMA Act with regards to the repatriation of their income earned outside India. To know more about different NRI status keep reading our blog.

NRE & NRO ACCOUNTS

NRI has an option to open the following types of accounts

  •         Non-Resident External Account (NRE Account)
  •         Non-Resident Ordinary Account (NRO Account)
  •         Foreign Currency Non-Resident Account (FCNR Account)

Both NRE and NRO Accounts can be Saving Account or Current Account or Recurring Deposit or Fixed Deposits Account, while FCNR Account is a Fixed Deposit Account only.
In this article, we will discuss the meaning of NRE and NRO Account, its comparison, Benefits and other similar concepts in a very simple manner.

Meaning

Non-Resident External Account (NRE Account): 

NRE account is maintained in Indian Rupee by NRI to park his overseas income. The NRI will have to convert his income in foreign currency into Indian Rupee, at the prevailing exchange rate. If the NRI wishes to repatriate the amount in his NRE account to his country of residence, then he will have to reconvert the amount to be repatriated, from Indian Rupee into the currency of the country of his residence.

NRI can operate the NRE account through a Resident Power of Attorney. The Power of Attorney can make a withdrawal from NRE Account on behalf of the NRI for meeting local expenses.

The amount deposited in the NRE Account and the interest earned on such deposits is totally tax-free.

Non-Resident Ordinary Account (NRO Account):

NRO Account is an account maintained in Indian Rupee, by the NRI for any income earned by him or accrued to him in India. example- Rental Income from House Property in India, Dividend from Indian Companies.

Whenever the Residential Status of any individual changes, his normal bank account can also be redesignated into NRO Account.

This account can be opened by two NRI or jointly with an Indian Resident. This account can also be used for basic payments like electricity or water bill payments.

As compared to NRE Account, the Interest earned on NRO account is not tax-free.

Foreign Currency Non-Resident Account (FCNR):

In India, the saving Bank interest rates are much higher then as compared to other countries. This is one of the reasons that most of the NRI wants to invest in India. But in this case, although they earn higher returns they always have a foreign exchange risk. Let me explain it with an example:

Mr. Nimesh (NRI) lives in Australia. He invests $10000 for a year on 10.08.2019 in India. Other details are as follows:

Particulars India Australia
Deposit Interest Rate 10% 2%
Date 10.08.2019 10.08.2020
Exchange Rate per Doller 60 70

As on 10.08.2019: The amount in rupees that Mr. Nimesh Invest in India: 

$10000 * 60 = 6,00,000/-

Interest amount earned in a year on 10.08.2020: 6,00,000 * 10% = 60,000

Total Amount that Mr. Nimesh have as on 10.08.2020: 6,00,000 + 60,000 = 6,60,000

Now, Mr. Nimesh Convert the amount in dollars: 6,60,000 / 70 = 9428.57

Net Gain (Loss) to Mr. Nimesh: 

$10000 (Investment Amount) – $9428.57(Withdrawal Amount) = 571.43 (Loss)

That means although he has earned a better interest in India as compared to Australia due to a decrease in rupee rate during the year, he has to incur a net loss of $571.43

Hence, to save from such exposure risk, the government has allowed the NRI to open an account in the foreign currency itself in India. The account in which the NRI deposit such foreign currency is called foreign currency Non-Resident Account (FCNR).

Difference between NRE Account and NRO Account

S.No. Particulars NRE Account NRO Account
1 Meaning This account is held for maintaining foreign currency foreign income  in India This account is held for maintaining Indian earning in India
2 Funds An NRE account can be open with foreign funds An NRE NRO  Account can be open with foreign funds as well as Indian rupees
3 Taxation The amount deposited and interest income earned on such deposits is tax-free in India Such benefit is not available in NRO Account Interest earned on NRO account is taxable.(Tax rate – 30%)
4 Joint Account NRE Account can be held with only with any other NRI Person NRE Account can be held with any NRI Person or Indian Resident
5 Repatriation Repatriation is possible for both principal as well as interest amount Repatriation can be done for interest amount freely. Repatriation can be done for interest amount after deduction of TDS. For repatriation of the principal amount, there are certain limits
6 Exchange Risk Exchange Rate  Since the amount deposited in the account is in the form of Foreign Currency, such an amount is exposed to  Exchange Rate Risk If deposits and withdrawals are in Indian rupees then NRO Account shall not be Prone exposed to Exchange Rate Risk

Benefits of having NRE Accounts

  1. In NRE Account, Any NRI can deposit its foreign earned currency in India, which helps the NRI to transfer it’s earning to its family. Through NRE the foreign income earned by NRI such as salary can be made available to the NRI’s family.
  2. As compare the other specified countries, Indian banks give more interest, hence the NRI may also get a higher rate of interest. NRI can claim the benefit of a higher interest rate on bank deposits available in India.
  3. The person maintaining NRE Account Through the NRE Account NRI can easily avail the benefits of other banking services from banks like availing taking a loan at lower interest rates and other facilities.the lower interest cost, 
  4. As already discussed above, the interest income earned and the amount of deposits is totally tax-free

Benefits of having NRO Account

  1. The major benefit of having an NRO account is managing of the income earned in India. For Example, Mr. Nimesh is an NRI having to hold a house property in India which has been let out. Hence, the rental income earned can be deposited in the NRO Account.
  2. As discussed above, this account can be open opened jointly with an Indian resident also. That means, Thus the family member of NRI, who is an Indian resident can also be open the NRO Account with him.jointly open and operate the NRO Account with the NRI.

Taxation in NRE and NRO Account

In NRE Account: Amount deposited and interest income earned is exempted from income taxes.

In NRO Account: Such income tax benefit is not available. That means NRO deposits attract taxes as per income tax act, 1961 @ 30%.

Also, if the income is more than 1 crore then a surcharge of 15% shall also be added with 4% Cess. So the net tax rate shall be 30%+15%+4%= 35.88%

Which Account is beneficial for the NRI

If the NRI wishes to utilize his foreign earned income for the benefit of his family members  or utilize it for making any investment in India then NRE Account will be beneficial

On the other hand, if he wants to manage to keep his Indian earning then NRO account is suitable beneficial.

NRE & NRO Accounts

Conclusion

Let’s understand it with a simple example

Mr. Nimesh went to the US for employment last year. Since, he resides there for more than 182 days, hence he becomes a Non-Resident. His family lives in New Delhi. Mr. Nimesh has also owned 10000 shares of Reliance Industries. In August month, RIL issued a dividend of Rs. 1,00,000/- to Mr. Nimesh.

He has received the salary income of 10000$ in August month. 

Now, Mr. Nimesh has 2 income. One is in the foreign currency as salary and second is in Indian currency as dividend income.

He shall deposit the salary in NRE Account which shall be converted in the Indian currency at the prevailing exchange rate on that day and Dividend income shall be deposited in the NRO Account.

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