NRO & NRE diff

8/3/2019 NRO & NRE diff

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When you (an Indian citizen) leave India for taking up employment, businessor vocation outside India or for any other purpose indicating your intention tostay outside India permanently or for an uncertain period you become a personresident outside India under FEMA. Put simply, you become a non-resident

Indian (NRI) and your existing bank accounts are required to be designated asNRO [Non- Resident Ordinary Rupee Account] accounts.

After you go and settle overseas you can still maintain your existing NROaccounts and can also open new NRO or NRE [Non-Resident (External) RupeeAccount] account.

Both are rupee denominated accounts and can be maintained in any form(savings, current, recurring or term deposit accounts). However, they differ inmany aspects.

The main points of difference between NRE and NRO accounts are highlightedbelow:

1. PurposeThe basic purpose of NRO account is to keep your existing (i.e., before youbecome an NRI) funds and also the money you earn or acquire in India afterbecoming an NRI.

Whereas NRE accounts are meant for foreign exchange earned outside India

and transferred to India.

2. CurrencyAs obvious, NRO accounts are maintained in Indian Rupees. NRE accounts arealso rupee denominated i.e., maintained in Indian rupees by converting theforeign exchange at the current prevailing exchange rates.

3. Kind of credits allowedLocal funds that arent eligible to be remitted abroad (i.e., funds which do notqualify under exchange control regulations, for remittance outside India) mustbe credited to an NRO account. Overseas funds or local funds that are allowedfor overseas remittance can instead be credited to NRE account.

4. Inter-account transfersYou can make transfer from NRE to NRO account but not vice-versa. And


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once the funds stands transferred to NRO account, it cant be transferred backto NRE account. Put another way, it becomes non-repatriable.

5. Taxation

NRO accounts interest is taxable under Indian income tax, whereas interestearned on NRE account is exempt (i.e., tax- free).

6. RepatriationFunds in NRO accounts cant be remitted abroad freely (i.e., cant be takenoutside the country). RBI has allowed remittances only up to USD one million(this limit includes sale proceeds of immovable property held by NRIs) perfinancial year (April March) for bonafide purposes (e.g. education, medicalexpenses etc) to the satisfaction of the bank. However, current income

(including interest, dividends, rent, pensions) is freely repartiable but subjectto tax deduction at source.

On the other hand, the entire credit balance inclusive of interest earnedfrom NRE accounts is freely repatriable without any restriction and withoutany reference to RBI.

7. Joint holdingsJoint holdings is allowed in both accounts but unlike NRO account (where joint

holding with Indian resident is allowed), in case of NRE account joint holderalso need to be an NRI.

Thus, if you wish, you can open a NRO account jointly with your relativeresiding in India. But remember that in such joint accounts, the funds ofresident joint holder cant be credited.

However, for operating both of these accounts, you can authorise an Indianresident a friend or a family member whom you trust to operate youraccount by submitting a mandate letter (most banks have a readymade

format) to the bank. The mandate operates like a power of attroney (POA).

8. Exchange RiskUnlike NRO account, NRE account is exposed to exchange fluctuation risk.

All foreign exchange remittance received for credit to NRE accounts is first


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converted to Indian rupees at the prevailing exchange rate. But as repatriationis allowed in foreign currency (i.e., rupee again gets reconverted into dollars),therefore these accounts are susceptible to exchange loss which is basically oftwo kinds.

First, is the conversion loss there is difference between buying & selling rateof banks and this difference has to be borne by the account holder. Second, isthe day-to-day fluctuations in the exchange rates.

9. Rate of interestReturns on NRO accounts are at par with domestic accounts. In other words,interest paid on NRO savings account is same as that paid on domestic savingsaccount (current rate is 3.50%) and returns on NRO fixed deposits are at parwith that offered on domestic fixed deposits (current rates are broadly

between 3% and 10% depending on the period and the bank).

Interest on NRE savings deposits are also at the same rate as applicable todomestic saving deposits (currently the interest rate is 3.5%) while interestrates on NRE term deposits are regulated by RBI and are much lower thanthat paid on the NRO term deposits. These rates are pegged to international(LIBOR/SWAP) interest rates and are revised by RBI from time to time.

Current NRE term deposit rates are LIBOR/SWAP rates (as on the last workingday of the previous month) plus 175 basis points . The relevant LIBOR/SWAP

rates are published by FEDAI (fedai.org.in).Thus, rates effective from 1stDecember, 2008 are 4.52% ( 1-2 years), 3.87% (2-3 years) and 4.14% (3-5 years)p.a. compounded quarterly but are subject to monthly revision and are as perthe guidelines issued by RBI from time to time.

Besides, unlike NRO FDs, minimum tenure for NRE FDs is one year; no interestis paid if the deposit is cancelled prematurely before I year; and rates are sameacross the banks (cant exceed the ceiling rates fixed by RBI).

In a nutshell, NRE accounts offer all the facilities (except returns) of NROaccounts plus free repatriation and tax exemption. However, as returns are notattractive, NRE deposits are not a good investment in themselves. Ratherthese accounts are good as a temporary parking channel for making furtherinvestments (on repatriable basis), say, in capital markets or mutual funds.Also see:1.NRIs: Tax Planning2.NRIs: Planning the Residential Status
http://www.themoneyquest.com/2009/08/nri-non-resident-indian-tax-planning.htmlhttp://www.themoneyquest.com/2009/08/nri-non-resident-indian-tax-planning.htmlhttp://www.themoneyquest.com/2009/08/nri-non-resident-indian-tax-planning.htmlhttp://www.themoneyquest.com/2009/09/nris-non-resident-indian-tax-it-fema.htmlhttp://www.themoneyquest.com/2009/09/nris-non-resident-indian-tax-it-fema.htmlhttp://www.themoneyquest.com/2009/09/nris-non-resident-indian-tax-it-fema.htmlhttp://www.themoneyquest.com/2009/09/nris-non-resident-indian-tax-it-fema.htmlhttp://www.themoneyquest.com/2009/08/nri-non-resident-indian-tax-planning.html


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7 responses to "NRI Bank Accounts DifferenceBetween NRO & NRE"

1. Ramgp|August 29, 2009 says:Dear Sirs,

By opening NRO account (for the purpose of depositing local currencies) if money isnon-repatriable,then it is better to have ordinary savings account. Is it illegal to haveopened Savings account by Non-resident Indian? if so how to manage if one becomesnon-resident for initial period for some years and resident for later period and thenagain becoming non-resident thereafter? Can anyone enlighten me please?

2. Fisher|August 29, 2009 says:First, know that youre allowed to repatriate USD one million every year from your NROaccount.
http://www.themoneyquest.com/2009/09/nris-non-resident-indian-tax-it-fema.htmlhttp://www.themoneyquest.com/2009/08/interest-bank-fds-fixed-term-deposits.htmlhttp://www.themoneyquest.com/2009/08/interest-bank-fds-fixed-term-deposits.htmlhttp://www.themoneyquest.com/2009/08/interest-bank-fds-fixed-term-deposits.htmlhttp://www.themoneyquest.com/search/label/NRI%27shttp://www.themoneyquest.com/search/label/NRI%27shttp://void%280%29/http://void%280%29/http://void%280%29/http://www.blogger.com/profile/11153583338684483735http://www.blogger.com/profile/11153583338684483735http://www.themoneyquest.com/2008/12/nri-bank-accounts-difference-between.html?showComment=1251527679742#c6091291932252786758http://www.themoneyquest.com/2008/12/nri-bank-accounts-difference-between.html?showComment=1251527679742#c6091291932252786758http://www.themoneyquest.com/2008/12/nri-bank-accounts-difference-between.html?showComment=1251527679742#c6091291932252786758http://www.themoneyquest.com/http://www.themoneyquest.com/http://www.themoneyquest.com/2008/12/nri-bank-accounts-difference-between.html?showComment=1251566562456#c4075170135323647117http://www.themoneyquest.com/2008/12/nri-bank-accounts-difference-between.html?showComment=1251566562456#c4075170135323647117http://www.themoneyquest.com/2008/12/nri-bank-accounts-difference-between.html?showComment=1251566562456#c4075170135323647117http://www.themoneyquest.com/2008/12/nri-bank-accounts-difference-between.html?showComment=1251566562456#c4075170135323647117http://www.themoneyquest.com/http://www.themoneyquest.com/2008/12/nri-bank-accounts-difference-between.html?showComment=1251527679742#c6091291932252786758http://www.blogger.com/profile/11153583338684483735http://void%280%29/http://www.themoneyquest.com/search/label/NRI%27shttp://www.themoneyquest.com/2009/08/interest-bank-fds-fixed-term-deposits.html

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NRO & NRE diff