NRE And NRO Accounts – Understanding The Key Differences

1. NRE And NRO Accounts – Understanding The Key Differences For individuals living outside India, handling financial matters across borders often requires careful planning and a clear understanding of available options. Whether it’s maintaining savings, sending money home, or managing income in India, choosing the right banking solution is crucial. Non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) often need specialized accounts to ensure smooth and compliant financial management. Among the available choices, certain account types are specifically designed to meet the needs of non-residents. Understanding how these accounts work, and the differences between them, can help you make more informed and effective decisions about your financial future. Regulatory framework and account options for non-residents The Reserve Bank of India (RBI), under the Foreign Exchange Management Act (FEMA), allows Non- Resident Indians (NRIs) and Persons of Indian Origin (PIOs), including Overseas Citizens of India (OCIs), to maintain specific types of accounts in Indian banks to facilitate seamless financial management. Two of the most commonly used are the Non-Resident External (NRE) account and the Non-Resident Ordinary (NRO) account. While both accounts are designed for individuals residing outside India, their purposes, repatriation rules, taxation, and other regulations differ significantly. What are NRE and NRO accounts used for? The NRE account is primarily intended to park overseas earnings in Indian rupees, such as salaries earned abroad, foreign investments, or business income. The NRO account, on the other hand, is designed to manage income earned in India, such as rents, dividends, pensions, or interest from Indian investments. This distinction is vital as it determines how the funds are taxed, repatriated, and used. Repatriation rules

2. One of the major points of difference between these two accounts lies in repatriation, that is, the ability to send money abroad. The NRO account allows full repatriation of both principal and interest, meaning the funds can be freely transferred back to your overseas account without restriction. On the other hand, in the case of an NRE account, while interest is repatriable, the principal amount is repatriable up to USD 1 million per financial year, subject to documentation and taxation norms. Importantly, funds transferred from an NRE account to NRO or resident accounts would lose repatriability. Taxation differences One of the major distinctions between the two accounts lies in taxation:  NRE account: The interest earned is tax-free in India. This makes it a more attractive option for NRIs looking to grow their overseas income in India without incurring Indian tax liabilities. NRO account: Interest earned is subject to taxation in India, and Tax Deducted at Source (TDS) is applicable as per Indian tax laws.  This difference makes the NRO account less lucrative from a returns standpoint, although it is necessary for managing Indian income sources. Change of residential status A crucial regulation under FEMA pertains to the change in residential status. When there is a change in residential status, the bank needs to be notified and type of account needs to be updated accordingly.  When a Person Resident In India becomes a Person Resident Outside India (NRI or PIO or OCI), the normal resident account needs to be re-designated as NRO savings account and vice versa. And now, the person would be eligible to open NRE and FCNR accounts. On the other hand, when the person becomes resident in India from non-resident, the NRE account is to be closed and funds in the NRE account is to be transferred to the resident savings account or to the Resident Foreign Currency (RFC) account at the option of the account holder.  Premature withdrawal rules Both NRE and NRO deposits can be withdrawn prematurely. Banks are allowed to levy any penalty at their discretion. In the case of premature withdrawal, the penalty provisions should be clearly disclosed to the depositor at the time of acceptance of the deposits. Many banks may not charge any penalty for premature withdrawal after 1 year. If there is no premature penalty, the interest rate applied on the pre- matured deposit would be the lower of the interest rate of the deposit or the interest rate of the deposit for the term pre-matured deposit kept at the time of initial deposit.  Example: If Mr. Chandrakant Desai, from Hong Kong invested Rs. 10,000,000 in an NRE bank deposit in April 2025 for 5 years at 9%. However, he prematurely withdraws the deposit after 12 months in May 2026. In April 2025, the interest rate on 1-year deposit was 8%. If the bank does not charge any premature penalty, he would get interest @ 8%, lower of the interest rate on the deposit of 9% or interest rate on the tenure for which the deposit is kept (1 year) at the time of the initial deposit (April 2025) of 8%. If the bank charges 1% penalty, he would get interest of 7%. Nomination and interest rate regulations Both NRE and NRO accounts provide a nomination facility to account holders. However, banks are not allowed to give any additional interest rate benefits on any type of deposits of non-residents. Thus, NRIs cannot get the additional interest available to senior-citizens (up to 1%) or bank employees (1%). This rule

3. ensures that all non-resident account holders are treated uniformly, irrespective of their age or employment status with the bank. Loans against NRE and NRO accounts RBI allows loans and overdraft facility against the balances in the NRE or NRO accounts to the account holders or to the third party. The loan amount is to be utilized for meeting the borrower’s or third party’s personal requirements and/or for business purposes. However, the borrowed money cannot be used for carrying on agricultural or plantation activities, investment in real estate business or re-lending. All the rules and regulations of RBI related to margin, rate of interest, etc. are required to be complied with. Additionally, loans can be made in foreign currency against NRE deposit accounts, and the funds are also allowed to be utilized outside India by the account holder or by the third party at the request of the depositor for bona fide purposes. Joint holding rules Joint holding rules for NRE and NRO accounts differ significantly in terms of flexibility. An NRE account can be held jointly only with another NRI or PIO, ensuring that all account holders maintain a non-resident status. In contrast, an NRO account offers greater flexibility, as it can be held jointly with either a resident Indian or another NRI/PIO. This makes the NRO account particularly suitable for NRIs who have financial ties or shared responsibilities with family members still residing in India. Choosing between an NRE and NRO account depends entirely on the source and intended use of your funds. If you’re planning to invest your foreign income into India and need full repatriability with tax-free returns, an NRE account serves your purpose well. On the other hand, if you’re receiving income from Indian assets, an NRO account is necessary and legally compliant. Understanding these differences ensures you stay aligned with FEMA guidelines and make the most of your cross-border financial management. NOTE: Always notify your bank of any change in residential status, so your account classification remains accurate. Complying with RBI norms not only ensures a smooth banking experience but also avoids any unnecessary legal or tax complications. If you are an NRI or planning to become one, make sure to consult with your bank and financial advisor before choosing between NRE and NRO accounts to suit your individual needs. Need help with NRE & NRO account management in India? For expert assistance, consult ExpertNRI – a trusted platform guiding NRIs through regulatory compliance, taxation, and optimal financial structuring. Whether you’re opening a new account or navigating repatriation rules, ExpertNRI ensures your cross- border banking is efficient and compliant. Resource: NRE And NRO Accounts – Understanding The Key Differences