Before we start understanding what NRO and NRE account is, let us first try to understand the meaning of an NRI.
Who is an NRI?
According to the Income Tax Act of India, an NRI is an Indian Citizen who stays abroad for an extended period of time, without an intention to come back to India. His stay abroad could be for reasons as simple as work or education. Officials of the Indian Government who go abroad on official missions are also referred to as a Non-Resident Indian or NRI. Generally, a period of stay greater than 182 days is considered to determine residential status in India.
What is the meaning of NRE and NRO account?
My first encounter with the NRE and NRO accounts came when I shifted back to India from the Middle East in 2007. When I went to open a bank account, there were different terms being thrown at me, and I had difficulty understanding most of them. To start off with, NRO or Non Resident Ordinary Account refers to an Indian bank account held by an NRI to manage his/ her Indian incomes.
For example, I have an apartment in India that I have rent out to my tenants. They deposit the rent monthly into my bank account. If I was in Dubai, it would be unrealistic for me to expect them to convert this money to Dirhams and deposit it into my bank account in Dubai. Therefore, I will create an Indian account in order to receive these moneys. All the moneys received in an NRO account are completely taxable as they are earned in India.
An NRE or Non Resident External Account refers to an Indian Rupee account, located in India, where I can deposit my foreign currency. This would automatically be translated into Indian Rupees on the date of deposit. For example, if I wanted to save money in Rupees, I would deposit all my Dirhams into an NRE account in India, which will automatically be converted into Indian Rupees. This is useful for all the NRIs who want to save money in India, and who plan to return to India some time in the future. An advantage from having an NRE account is that the interest earned from the same is free of taxes.
What are the differences between an NRE and an NRO account?
The major difference is purpose! Are you opening an account to collect and deposit your money earned in India? Then open an NRO account.
Are you opening an account to collect and deposit money earned outside India? Then it is an NRE account.
Since the amounts deposited in these accounts vary with respect to the source, it is also helpful to understand that tax-ability is another major difference. NRO accounts are fully taxable while NRE accounts are tax exempt. An easy way to remember this is – money earned in India is taxable, while money earned outside is not.
Repatriation outside India is also freely allowed in an NRE account (Remember, this is money earned outside, so you can take it out). You can transfer from an NRE account to another NRE or NRO account. But from an NRO account, you can only transfer to another NRO account. (Remember, this is money earned in India. So keep it in India).
Can NRI open both NRE and NRO account?
Yes, NRI can open both NRE and NRO account as explained above.
Can I withdraw money from NRE and NRO account?
Yes, You can withdraw money from NRE and NRO account.
Can you transfer money from NRO to NRE account?
Transfer from an NRO account to an NRE account is possible. Recently the RBI has introduced norms to facilitate and allow this transfer provided it is within FCRA and FEMA limits.
You also need to remember that only foreign currency can be deposited in an NRE account. INR is not allowed! Depositing foreign currency in your bank account might also not be allowed by local branches, and needs special permissions. Thus, it is easier to hold an NRE account to keep your foreign cash.
Can you transfer money from NRE to NRO account?
Yes, You can transfer money from NRE to NRO account.
Can you deposit Indian rupees in NRO account?
Yes, You can deposit Indian Rupees in NRO Account.
Can a person have NRE and Savings account?
Banks do not allow people to hold both savings and NRE/ NRO accounts. NRIs are encouraged to close their local savings accounts and only have an NRE or NRO accounts. It is prohibited to have both these accounts at the same time.
Which is the best bank for NRE accounts in India?
There is no simple answer to this. When I came to India, it took me a lot of time and effort to narrow down my search and understand the different facilities provided by different banks in India. These banks provide an interest on the INR equivalent of the foreign currency being deposited in the accounts. This is important to remember as you do not get interest on the foreign currency, but only on the INR equivalent.
One of the best banks that cater to the NRI audience is the RBL bank, based in Mumbai. They provide interest rates from 5.50% to 6.50% on their NRE accounts depending on the amount being deposited. Fixed deposits even fetch you close to 8% interest rates. If you are in the USA and reading this, it is not a typo. Interest rates in India are extremely high.
Deutsche bank has an interesting NRE Plus Savings account, where they provide interest of 7.50% and more if you hold greater than a minimum balance of one lakh in these accounts. Other banks like Kotak and SBI also provide interests of close to 7.00% on their NRE deposits.
Now let us assume you transfer money from your account in the US to India. Will you have to pay tax on this amount?
You don’t have to. As long as the account you are transferring the money to is an NRE account, all the money you transfer to India will be tax free.
What if this account is an NRO account? Two thing you need to remember here! One, you can only deposit Indian Rupees into an NRO account. Therefore transferring money from the US to an NRO account is out of questions. Second, an NRO account will automatically have tax attached to it since it is assumed you are earning the money IN INDIA. Remember the principals always! Earn in India, Pay in India.
Do we have TDS implications on NRE and NRO accounts in India?
NRE accounts generally do not have tax when you deposit money into it. Therefore, there is no implication on tax deducted at source or TDS.
But, NRO accounts are completely taxable. Moreover, since the assesse is a non-resident in this case, a flat TDS of 30% is deducted. Remember, it is not 10% as is the case for all other resident assesses.
Is interest on NRE fixed deposit taxable in India?
No, NRE fixed deposits are not taxable in India.
Can I claim a refund on TDS for my interest?
Yes, you can. The general slab system of income tax gives you a benefit of up to 2.5 lakh rupees. Only income over and above this amount is taxable. In case the amount you have earned on your NRE/ NRO accounts are greater than 2.5 lakhs, you will have to pay a tax of 10% on this. You can claim a refund for the excess tax deducted by filing a return in India.
Also Read : Can NRI invet in mutual funds, PPF, Stocks, NPS?
Now let us look at some examples…
Mr. A earns an amount of 2L in the USA working for the Microsoft Corporation. He wants to remit this back to India to his parents. Now, he opens an NRE account for this purpose. He deposits the 2L in the account and gets an interest of 10k on the same. How much is taxable from the above?
Here, we need to understand that the amount earned by Mr A is earned outside India. Therefore, 2L is completely tax exempt. With respect to the 10k interest, it is earned on a deposit IN INDIA. Therefore, it is completely taxable.
Assume the same Mr. A owns a house in Hyderabad that he has rented out for 20k per month. The tenant deposits this amount in an NRO account in India. Would this amount also be taxable? Assume this earns him an interest of 10k per year.
Since both the original amount as well as the interest is earned IN INDIA, both these amounts will be taxable. Mr A has to pay tax on both the 20k per month and the 10k interest per annum. TDS will be deducted at 30% on this amount. In case his total income is below the exempt limit, he can claim a refund by filing his income tax returns before the due date.
By introducing the concept of NRE and NRO accounts, the government and RBI have ensure they do not double tax those working abroad. If this concept was not present, somebody like Mr A must pay tax in the USA as well as in India when he remits the amount. These accounts are a life-saver for the general population, which so dearly depends on jobs abroad for everyday survival.
So, what is your view on NRE and NRO account?