Choosing the Right NRI Account: NRO or NRE Account
As per FEMA regulations, a Non-residential Indian or NRI cannot have a savings account in India. They need to transfer their bank account in India to an NRI account for;
● Holding their foreign earnings in Indian currency, or,
● Holding their Indian earnings in Indian currency
Alternatively, you can close your existing bank account and open a new NRI account from scratch.
There are two types of NRI accounts broadly;
1. NRE (Non Resident External) Account
2. NRO (Non Resident Ordinary) Account
Both these accounts are rupee-denominated accounts and can only be opened by an NRI or PIO (Person of Indian Origin). Moreover, both come in two variants – current and savings account.
For new or to-be NRIs, choosing between the two can be confusing since they sound very similar. Some key differences listed below can help.
1. The Key Purpose of the Account
While an NRE bank account is used to deposit your foreign earnings in an Indian account, an NRO account is used to deposit your earnings in India, such as salary, rent, dividend, etc. Thus, an NRE bank account is ideal for those who have only foreign income and wish to send it to a rupee denominated account. On the other hand, an NRO account can be used by NRIs who generate income from India while living abroad.
2. Deposit Rules
You can deposit only foreign earnings in an NRE bank account. But, with an NRO account, you can deposit both foreign earned and Indian earned income. However, withdrawals from both the accounts can only be made in INR.
3. Repatriability of Funds
NRE accounts can be completely repatriable. That is, you can transfer funds (principal and interest) from this type of NRI account to your account in the country of your residence without any restriction.
With an NRO account, while you can transfer the interest earned without any restrictions, the principal amount has limited repatriability. You can transfer funds only after paying applicable taxes, and the maximum repatriation is up to 1 million USD in a financial year.
4. The Taxation Rules
Both, principal and the interest earned in NRE saving accounts are tax-free. On the other hand, income accumulated in the NRO account is taxed at 30% plus 3% cess. Moreover, the interest earned above Rs 10,000 in a financial year is also taxed.
5. Joint Holding of the Account
In NRE accounts, joint holding is only possible with another NRI. Indian residents may not be eligible to have a joint NRE account. In the case of an NRO account, joint holding is acceptable even if one of the account holders is an Indian resident.
6. Exchange Rate Risk
There is no exchange risk in an NRO account unless the deposit is made in foreign currency. On the other hand, the exchange rate risk is usually higher in NRE bank accounts since the funds are transferred to Indian currency every time the deposit is made.
Choosing the Right NRI Account
As mentioned before, NRO accounts are for keeping your Indian earnings in India, and NRE bank accounts are for keeping your foreign earnings in an Indian rupee denominated account. Thus, there is not much to choose as the right type of account would depend on the source of your earnings.
However, it may be a good idea to open both these types of accounts as they can help you meet two very different purposes. Most importantly, choose the right bank to open your NRI accounts with an excellent international and national presence along with an impeccable service record.
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