Difference between Non
Resident Ordinary (NRO) Account and
Non-Resident External (NRE) Account. Which one should an NRI open?
Persons
with NRI status (Non Resident Indians) can choose between two options when
opening a bank account in India. The two options are an NRE or an NRO account.
Any NRI interested in opening a bank account at an Indian bank could use the
knowledge about the difference between these two account types. The most basic
use of these accounts is for money repatriation fr om the individual’s overseas
bank.
Non-Resident Ordinary
(NRO) Account
Any person/entity resident outside
India may open NRO account with an authorized dealer or an authorized bank for
the purpose of putting through bonafide transactions denominated in Rupees. In
other words a Non-Resident Ordinary account
(NRO) is the usual bank account, but opened by an Indian national who intends to
become a Non Resident Indian (NRI) while abroad.
NRO accounts may be opened /
maintained in the form of current, savings, recurring or fixed deposit accounts.
Rate of interest applicable to these accounts and guidelines for opening,
operating and maintenance of such accounts shall be in accordance with
directives/instructions issued by Reserve Bank (DBOD) from time to time.
Non-Resident External (NRE) Account
A
Non-Resident External (NRE) account is a bank account that’s opened by
depositing foreign currency at the time of opening a bank account.
Any NRI can open an
NRE account
with funds remitted to India through a bank abroad. This is a repatriable
account and transfer from another
NRE account
or FCNR (B) account is also permitted. An
NRE rupee account
may be opened as current, savings or term deposits.
This can be done in notes, or by using traveler’s checks.
Local payments can be freely made from NRE
accounts. Since this account is maintained in
Rupees, the depositor is exposed to exchange risk. NRIs / PIOs have the option
to credit the current income to their Non-Resident (External) Rupee accounts,
provided the authorized dealer is satisfied that the credit represents current
income of the non-resident account holders and
income-tax thereon has been deducted / provided for.
Features of NRO/NRE
Account
Opening the account
A NRE account may be opened individually or
jointly with another NRI, without any approval provided the funds are
transferred in a freely convertible currency. A NRO account however, can also be
jointly opened for rupee transactions without approval, but a joint account can
be opened by a NRI with a resident.
Funds which can be held and withdrawn from either
account
Overseas remittances or local funds belonging
to a NRI that would be sent to him can instead be credited to his NRE, or funds
could be transferred from another NRE account maintained in India. NRE accounts
allow only foreign currency deposits, and not rupees, although rupee withdrawals
are permissible from this account. The NRO will hold funds that are not eligible
to be sent abroad. However, an NRO account permits both foreign currency and
rupee deposits, but withdrawals are only in rupees.
Tax Treatment on Interest Earned
Interest earned on a NRO account, as well as on
the credit balances of this account, is taxed based on the account holder’s tax
bracket. However, the interest accrued on a NRE account is wholly exempted from
income tax, as well as wealth tax that would otherwise be charged on the credit
balances of the account. Also, cash gifts to this account do not attract taxes.
Transfers
Funds can be transferred from a NRE to a NRO
account, but funds transfer from a NRO to a NRE is not permissible. Once a
transfer to a NRO from a NRE account has been made, the funds are considered as
non-repatriation, and as such, they cannot be transferred back.
Summary:
ü
A NRE is Non-Resident External account, while a NRO is Non Resident Ordinary
account; both options are available for NRIs.
ü
A NRE account can be jointly opened by two NRIs, while a joint NRO needs one NRI
and a resident.
ü
A NRE allows only foreign currency deposits and rupee withdrawals, while a NRO
allows both foreign currency and rupee deposits, but only rupee withdrawals.
ü
A NRO account earns taxable interest, while interest and credit balances on a
NRE account are not taxed at all.
ü
A NRE to NRO funds transfer is possible, while a NRO to NRE transfer is not
permissible.
SNAPSHOT OF COMPARISON
BETWEEN NRE AND NRO ACCOUNTS
|
Point of Distinction
|
Non-Resident External
(NRE) Account
|
Non-Resident Ordinary
(NRO) Account
|
|
Currency
|
Rupee denominated
|
Rupee denominated
|
|
Type
|
Savings, Current or a Fixed / Term Deposit
|
Savings, Current or a Fixed / Term Deposit
|
|
Who can open?
|
NRI
|
NRI, Resident before becoming an NRI
|
|
Is repatriation allowed?
|
Yes
|
Usually no
|
|
What can be the source of funds?
|
Funds remitted from abroad, Funds from another NRE / FCNR account
|
Funds received from within India
|
|
Can funds be transferred to another account?
|
Funds can be transferred from an NRE account to an NRO / NRE / Resident account
|
Funds can be transferred from an NRO account to an NRO / Resident account
|
|
Can it be opened jointly with an NRI?
|
Yes
|
Yes
|
|
Can it be opened jointly with a resident?
|
No
|
Yes
|
|
What is the income tax treatment of the
interest earned?
|
Tax free
|
Taxed as per applicable slab rate
|
|
Can power of attorney holder open the
account?
|
No
|
No
|
|
Can power of attorney holder operate the
account?
|
Yes, can make local rupee payments
|
Yes, can make local rupee payments
|
|
Is nomination allowed?
|
Yes
|
Yes
|
|
What is the status of the account when NRI
returns to India for good?
|
Converted to resident account
|
Converted to resident account
|
....
