A Non-Resident Indian with income in India and abroad often gets confused about managing their finances in different bank accounts. They also find it challenging to track their finances in another country, even when they try to repatriate money to their home country. In such cases, one must understand the critical roles played by NRE and NRO accounts. This article covers everything related to the NRE and NRO accounts and what happens to them if you wish to save and manage your money in India while living abroad? Read on to learn more about this topic.
What is an NRE account?
A Non-Resident External Account is an Indian rupee-dominated account, providing complete security to your finances earned abroad. This account could be saving, current, fixed deposits, and recurring. All the foreign money earned by an NRI is converted into Indian Rupees and allows you to transfer your funds to your foreign bank account with no complications.
The basic rule of operating an NRE account is that- all the money you deposit in this account be earned outside India. One can quickly deposit or withdraw money using an international debit card. Plus, an NRE allows you to invest in mutual funds and conduct business activities in India.
Deposits in an NRE account are exempt from tax obligations.
What is a Non-Resident Ordinary Account (NRO)?
An NRO is an account managed by NRIs in India. The account lets you enjoy the benefits of your income earned in India in an Indian denomination. Account-holders can deposit, withdraw, and manage their funds in Indian rupees with no hassles. One can open an NRO account jointly with an Indian resident or an NRI.
The Interest earned by an NRO account holder is subject to TDS deductions.
NRO vs. NRE account- Key Differences
Deposit & Withdraws structure
|Non-Resident External Account|
The principal amount, along with the Interest, is tax-free
One can repatriate the entire amount
It is an ideal choice for individuals seeking to maintain their overseas earnings in Indian currency. It keeps savings in INR liquid.
Two NRIs can together open an NRE account.
Deposit in foreign currency, withdraw in Indian
Subject to conversion loss and fluctuation in INR value against a foreign currency
|Non Resident Ordinary Account|
The Interest earned is subject to TDS deductions
One can only repatriate the interest amount; the principal amount can only be done within certain limits.
Individuals who want to save their income from India in Indian currency only. These incomes could be in the form of rent, dividends, property, etc.
An NRI must include an Indian resident or another NRI.
Allows you to deposit in both foreign and Indian currency. However, you can only withdraw in Indian currency.
Not prone to risk
One common thing between both accounts is the average monthly balance, INR 75,000.
An NRE account is exempt from tax, including income tax, wealth, or gift tax in India. On the contrary, Interest earned in NRO accounts is subject to taxation, including wealth and gift taxes. However, one can avail of the reduced tax benefit as per the Double Taxation Avoidance Agreement (DTAA).
If you are an NRI, you can make non-repatriable investments in the following ways:
- Futures and options of equities
- Listed equity stocks
- IPOs of companies
- Mutual funds (equity, debt, and hybrid)
- Government securities
- Treasury bills (T-bills)
- Listed non-convertible or redeemable debentures
- National pension system
- Chit funds
As per RBI’s portfolio investment scheme, all NRIs are eligible to invest in stock markets. However, the aggregate investment cannot be more than 10% of an Indian company’s paid-up capital. Also, NRIs are prohibited from conducting non-delivery transactions. Also, NRI stocks can only be sold off after being credited to their Demat account.
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