When Indians move abroad for work or studies, they often need to manage their money both in India and in the country where they are living. To help with this, Indian banks offer special types of bank accounts for Non-Resident Indians (NRIs). Two of the most common accounts are the NRE account and the NRO account.
But what is the difference between nre and nro account, and how are they different? Let’s break it down in simple terms.
What is an NRE Account?
An NRE (Non-Resident External) account is a type of bank account that NRIs can open in India. Here are some key points about NRE accounts:
- Currency: The money in an NRE account is held in Indian Rupees (INR), but you can deposit foreign currency into this account. The bank converts the foreign currency into Indian Rupees.
- Purpose: The main purpose of an NRE account is to help NRIs handle their income earned outside India. For example, if you are working in the USA and you want to send money back to India, you can use an NRE account.
- Tax Benefits: One of the biggest advantages of an NRE account is that the interest earned on the money in this account is tax-free in India. You don’t have to pay any tax on the interest you earn.
- Repatriation: This is a fancy word that means transferring money back to your home country. With an NRE account, you can easily transfer your money back to the country where you are living. There are no restrictions on repatriation with an NRE account.
- Joint Account: You can open an NRE account jointly with another NRI, but not with a resident Indian.
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What is an NRO Account?
An NRO (Non-Resident Ordinary) account is another type of bank account for NRIs. Here are some important things to know about NRO accounts:
- Currency: Just like the NRE account, an NRO account is also held in Indian Rupees. You can deposit both foreign currency and Indian currency into this account.
- Purpose: The NRO account is designed to manage the income you earn in India. For example, if you have rental income from a property in India, a pension, or dividends from investments, you can use an NRO account.
- Taxation: Unlike an NRE account, interest earned on an NRO account is taxed in India. The bank deducts a certain percentage of tax from the interest before crediting it to your account.
- Repatriation: You can transfer money from an NRO account to a foreign account, but there are some restrictions. You can transfer up to us dollar 1 million out of the country each financial year, after paying applicable taxes.
- Joint Account: An NRO account can be held jointly with another NRI or with a resident Indian.
What is the Difference Between Nre and Nro Account?
Now that we know what NRE and NRO accounts are, let’s look at the main differences between them:
- Source of Funds:
- NRE Account: Used for income earned outside India.
- NRO Account: Used for income earned within India.
- Taxation:
- NRE Account: Interest earned is tax-free.
- NRO Account: Interest earned is taxable.
- Repatriation:
- NRE Account: Free repatriation of funds and interest.
- NRO Account: Limited repatriation of funds, up to us dollar 1 million per financial year, after paying taxes.
- Joint Account Holders:
- NRE Account: It can only be jointly held with another NRI.
- NRO Account: Can be jointly held with another NRI or a resident Indian.
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Which Account Should You Choose?
Choosing between an NRO and NRE account depends on your specific needs. Here are a few scenarios to help you decide:
- If you earn money abroad and want to send it to India: An NRE account is a good choice because it offers tax-free interest and free repatriation of funds.
- If you have income sources in India (like rent or dividends): An NRO account is suitable because it is meant to handle income earned in India, even though the interest is taxable.
- If you want to hold a joint account with a resident Indian: You should go for an NRO account because NRE accounts can only be held jointly with another NRI.
How to Open These Accounts?
Opening an NRE or NRO account is straightforward. Here’s a simple step-by-step guide:
- Choose a Bank: Most major banks in India offer NRE and NRO accounts. Choose a bank that provides good service and meets your needs.
- Fill the Application Form: You can apply online by completing the form on the bank’s website.
- Submit Documents: You need to submit some documents, such as:
- Proof of NRI status (like a work visa, resident permit, etc.)
- Passport and visa copy
- Recent photographs
- Proof of address (both Indian and foreign)
- PAN card (if available)
- Fund Your Account: Once you opened your account, you can start depositing money. For an NRE account, you can transfer funds from your foreign bank account. For an NRO account, you can deposit money earned in India.
- Start Using Your Account: After funding your account, you can start using it for different kinds of transactions like paying bills, transferring money, and earning interest.
Conclusion
Understanding what is the difference between nre and nro account can help NRIs manage their finances more effectively. The NRE account is ideal for managing foreign earnings and offers tax-free interest and easy repatriation. On the other hand, the NRO account is suited for handling income generated within India, although the interest earned is taxable.
By choosing the right account based on your needs, you can ensure that your money is managed efficiently and you get the best possible benefits. Whether it’s saving on taxes, sending money back home, or managing income in India, knowing how NRE and NRO accounts work is a crucial part of financial planning for NRIs.