NRE & NRO Accounts: A Comprehensive Guide for Taxpayers

Updated: Aug 28

An NRI (Non-Resident Indian) who earns money both domestically and overseas frequently struggles with money management. In addition, they encounter difficulties monitoring bank accounts located abroad and even while attempting to transfer funds to their personal account. The solutions to these issues lie in NRE and NRO accounts. This comprehensive guide offers detailed insight into these accounts.

Different Types of NRI Accounts

NRIs are able to open multiple accounts with Indian banks. These are:

Foreign Exchange Account Non-Resident (FCNR)
Non-resident External account (NRE)
Non-Resident Ordinary Account (NRO)
The amount of interest you earn and the kind of account you own determine your tax burden in India for these kinds of accounts.

In India, the first two account types—FCNR and NRE—are free of taxes. You did really read correctly! In India, there is no tax on the interest that is earned on these two accounts. However, interest on NRE accounts—which are now converted to Resident Foreign Currency accounts—becomes taxable for you upon your residency.

Why Consider NRE and NRO Accounts?

An Non-Resident Indian (NRI) is not permitted to hold a savings account in India under the provisions of the Foreign Exchange Management Act (FEMA). All of your foreign-earned savings should be transferred to a Non-Resident Ordinary (NRO) or Non-Resident External Account (NRE). As a result, there may be severe consequences for keeping the savings account open in the home nation. For Non-Resident Indians, opening an NRE or NRO account is therefore a feasible choice. It offers NRIs two benefits. Firstly, they can send their overseas profits to India at any time. Additionally, they are able to keep their income from India (from any assets) within their home country.

Illustration:

X travelled to the US last year to further her studies. She had opened an NRO account, earning Rs. 1,000,000 in interest. When she examined her 26AS, she discovered a TDS item for Rs. 30,900 that indicated her interest income in the NRO account had been deducted. In India, X doesn't make any additional money. Only the money that X earned or accumulated in India during the preceding year is subject to taxation in India because of her NRI status. Nevertheless, her only source of income is the Rs. 1,000,000 in interest from the NRO account. Therefore, in India, her entire income is not taxable. However, whereas interest generated on an NRE account is fully free, interest earned on an NRO account would be subject to 30.9% TDS. X would have to get a reimbursement for the TDS withheld from her interest income because she is not required to pay taxes on her whole income. By submitting an income tax return on the income tax portal, she can obtain the reimbursements for TDS.

Understanding NRE Accounts

The NRE account is valued in Indian rupees and provides complete protection. These accounts could be current, savings, recurring, fixed deposit, or another type. The foreign currency you deposit into this account is converted to Indian rupees. Furthermore, there are no restrictions or problems when transferring funds (principal and interest amount) from an NRE account to a foreign account. You should be aware that the funds you deposit into these accounts must originate from sources outside of India. You can use the worldwide debit card to make purchases and get cash withdrawals whenever you want. Moreover, investing in mutual funds would be quick and easy if you connected your NRE account number to the investment account. In India, an NRE account is mostly used for business transactions, investing and personal banking.

Understanding NR0 Accounts

Non-resident Indians (NRIs) keep current or savings accounts in India to manage their money received there. Customers of accounts can deposit and manage their funds without any hassles. The account might pay you money in Indian or foreign currencies. You can apply for an NRO account jointly with a resident Indian or even with an NRI. Even funds from your current NRE account may be transferred. On the other hand, the interest you get from this account is subject to TDS (Tax Deducted at Source).

NRE vs. NRO Account

The following table illustrates the differences between the NRE and NRO accounts:

Tax treatment: In India, there are no income, wealth, or gift taxes applied to an NRE account. On the other hand, interest on NRO accounts and credit balances is subject to taxation at the applicable income tax rate. They are also subject to wealth and gift taxes. The lower tax benefit is yours to utilise under the Double Taxation Avoidance Agreement (DTAA).
Joint account holding: Only if both parties are NRIs is it possible to have a combined NRE account. Alternatively, as stated in Section 6 of the Companies Act 1956, you may register an NRO account with another NRI or a resident Indian (a close relative).
Repatriation: Restitution access to NRO accounts is restricted. During an assessment year, you are not allowed to remit more than USD $1 million, inclusive of taxes, using an NRO account. The principal amount can only be repatriated up to certain limits, while the interest can be repatriated at any time. In addition, an undertaking and a certificate from a chartered accountant are needed. NRE account holders are eligible for free repatriation of the principal and interest.

There are some similarities between NRE and NRO too. Both these accounts are denominated in Indian rupees. Both current and savings accounts can be opened. Additionally, you have to keep an average monthly balance of Rs 75,000 in both accounts.

Conclusion

The decision on whether to open an NRE or NRO account depends on your particular financial circumstances. In case you lead a transnational lifestyle or anticipate frequent transactions between India and your home country, these accounts serve as a prudent financial safeguard in addition to being essential. To sum up, even though these accounts are optional, they are an invaluable part of your financial portfolio because they help you manage your wealth and make sure you're following Indian financial standards.

FAQ

Q1. Who can open an NRE and NRO account?

NRE and NRO accounts can be opened by both PIOs (Persons of Indian Origin) and NRIs (Non-Resident Indians).

Q2. Is it possible to have both an NRE and NRO account?

Yes, NRIs can hold both NRE and NRO accounts simultaneously. As was already mentioned, these accounts have several uses.

Q3. Are NRE and NRO accounts mandatory for NRI?

It is not necessary for NRIs to open an NRE or NRO account. Having these accounts is advised, nevertheless, in order to properly manage their finances in India.

Q4. What are the tax implications on the NRE and NRO accounts?

In India, interest NRE account amounts is not taxable. In addition, there is no wealth tax or gift tax on the capital or interest. Income tax is applied to interest accrued on NRO account balances. The income slab of the individual determines the tax rate. NRIs can, however, take advantage of a number of exclusions and deductions to lower their tax obligations.

Q5. What is the taxable limit of the NRO account?

Income tax is applied to interest earned on the account balance in an NRO account. The taxable limit is determined by the person's income bracket and the current Indian tax legislation.

Q6. Which account is better, NRE or NRO?

An NRE or NRO account may be selected based on the demands and specifications of the person. If an NRI wishes to manage and keep their foreign profits in India with full repatriability, then an NRE account is more suitable. However, if the NRI has income that was earned in India and needs to be managed, then an NRO account is appropriate.

Q7. Which is tax-free, NRE or NRO?

In India, interest earned on non-resident (NRE) accounts is tax-free. Conversely, interest earned on non-resident (NRO) accounts is liable to income tax. As a result, interest income in the NRE account is tax-free.

Q8. Is interest earned on the NRE/NRO account taxable?

In India, interest generated on NRE account balances is exempt from taxes. In addition, there is no wealth tax or gift tax on the capital or interest. NRO Account: In India, income tax is applied to interest accrued on NRO account balances. The income slab of the individual determines the tax rate.

Q9. Does NRI having only NRO Interest income need to file ITR in India?

In India, the interest on the NRO account is taxable. According to the Income Tax Act, filing an ITR is not required if a taxpayer's total income is less than the basic exemption amount of INR 2.5 lacs. Thus, an NRI must submit an ITR in India if:

Their total income is greater than the INR 2.5 lac basic exemption level.
To request a reimbursement for TDS withheld by the bank on NRO Interest

Q10. Are my NRE/NRO account funds repatriable?

Principal and interest are both returnable in the case of an NRE account. In contrast, only interest generated on the principal—not the principal amount itself—is repatriable in the case of an NRO account.

Q11. Does every account have to be converted to NRO?

It is required that you either close your present bank account or resident savings account or convert it to an NRO account once your residential status changes to NRI. Additionally, you need to change your fixed and recurring deposits to NRO deposits. You may be required to pay a penalty if you neglect to do this.

Q12. What happens if you don’t convert to an NRO account?

There are penalties if you do not transfer your resident savings account to an NRO account. These penalties can be up to three times the amount that is in your bank account. A fine of ₹2 lakh in case the sum cannot be measured.

Q13. What drawbacks come with having an NRO account?

The primary drawback of an NRO account is that you can only repatriate a certain amount of money each fiscal year. Only USD 1 million of your principal can be remitted once the relevant taxes have been paid.