Which account is better: NRE or NRO?

As allowed by the Reserve Bank of India (RBI) under the FEMA (Foreign Exchange Management Act) guidelines, an NRI may open NRE or NRO accounts for their regular banking needs. The decision to choose a specific bank account depends on the specific needs. These accounts carry different features regarding inward remittances/ transfers, flexibility to repatriate the funds abroad, account operations, etc.

While no specific account can be termed as better than the other type of account, here are the significant differences between NRO and NRE accounts which may help an NRI to choose the account best suiting their banking needs:

  1. Inward Remittances into Bank Account – While NRE accounts can only accept credits through foreign currency remittances from abroad, NRO accounts are flexible in receiving the inward remittances into the account in any currency, including the Indian currency. NRE accounts can only be used for receiving foreign income in India, while NRO accounts can be used for both foreign and domestic income. In case an NRI needs to receive domestic income in an Indian bank account, like rental income, dividend income, sale proceeds from an Indian asset in Indian rupees, etc., NRO accounts are best suited for such operations. NRE accounts can also be funded through foreign currency remittances or through transfer from another NRE account.
  2. Repatriation of Account Balance – While NRO accounts are flexible in receiving inward remittances, such accounts restrict the free repatriation of the account balance. An NRI can transfer such balances outside India only subject to specified limits. While the repatriation of the principal amount is subject to specified limits, the interest income earned in such accounts is freely repatriable. In contrast, the funds in NRE accounts can be freely repatriated. As such, NRIs can transfer the funds in NRE accounts outside India without any limits.
  3. Taxation of Interest Income – As per the Income Tax Rules, the interest income from NRE accounts and term deposits is exempt for the account holders. In contrast, the interest income from NRO accounts is taxable in India. However, the benefits of the provisions of Double Taxation Avoidance Agreements (DTAAs) can be availed by the NRI account holders on such interest income. Govt. of India has entered into such agreements with several countries, wherein benefits are provided on a reciprocity basis to avoid hardships to the taxpayers concerning double taxation of similar income in different countries.
  4. Joint Operations – NRO accounts provide more flexibility to the NRI account holders regarding joint operations. One can hold a joint NRO account with either a resident Indian or another Non-Resident Indian. On the other hand, an NRE account can be held jointly with another Non-Resident Indian only. One cannot hold a joint NRE account with a resident Indian. However, one can appoint a resident Indian as a mandate holder for the NRE account for the convenience of the account operations.
  5. Foreign Currency Loan against Account – The balances in NRO accounts cannot be pledged against foreign currency loans taken outside India. This is due to the repatriation restrictions on such balances. In contrast, there are no restrictions on the NRE accounts to be pledged against foreign currency loans taken outside India.

While NRO accounts allow inward rupee transactions and joint operations with resident Indians, NRE accounts provide flexibility in funds repatriation outside India and tax exemption for interest income. One may choose the specific type of bank account as per their specific transaction requirements.

Disclaimer – The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules, as tax benefits are subject to changes due to change in tax laws.