NRI Bank Accounts – Difference Between NRO & NRE

When you (an Indian citizen) leave India for taking up employment, business or vocation outside India or for any other purpose indicating your intention to stay outside India permanently or for an uncertain period you become a person resident outside India under FEMA. Put simply, you become a non-resident Indian (NRI) and your existing bank accounts are required to be designated as NRO [Non- Resident Ordinary Rupee Account] accounts.

After you go and settle overseas you can still maintain your existing NRO accounts and can also open new NRO or NRE [Non-Resident (External) Rupee Account] account.

Both are rupee denominated accounts and can be maintained in any form (savings, current, recurring or term deposit accounts). However, they differ in many aspects.

The main points of difference between NRE and NRO accounts are highlighted below:

1. Purpose: The basic purpose of NRO account is to keep your existing (i.e., before you become an NRI) funds and also the money you earn or acquire in India (e.g., rent, dividend, Indian Salary)after becoming an NRI.

Whereas NRE accounts are meant for foreign exchange earned outside India and transferred to India.

2. Currency: As obvious, NRO accounts are maintained in Indian Rupees. NRE accounts are also rupee denominated i.e., maintained in Indian rupees by converting the foreign exchange at the current prevailing exchange rates.

3. Kind of credits allowed: Local funds that aren’t eligible to be remitted abroad (i.e., funds which do not qualify under exchange control regulations, for remittance outside India) must be credited to an NRO account. Overseas funds or local funds that are allowed for overseas remittance can instead be credited to NRE account.

4. Inter-account transfers: You can make transfer from NRE to NRO account but not vice-versa. And once the funds stands transferred to NRO account, it can’t be transferred back to NRE account. Put another way, it becomes non-repatriable.

5. Taxation: NRO accounts interest is taxable under Indian income tax, whereas interest earned on NRE account is exempt (i.e., tax- free).

6. Repatriation: Funds in NRO accounts can’t be remitted abroad freely (i.e., can’t be taken outside the country). RBI has allowed remittances only up to USD one million (this limit includes sale proceeds of immovable property held by NRIs) per financial year (April – March) for bonafide purposes (e.g. education, medical expenses etc) to the satisfaction of the bank. However, current income (including interest, dividends, rent, pensions) is freely repartiable but subject to tax deduction at source.

On the other hand, the entire credit balance inclusive of interest earned from NRE accounts is freely repatriable without any restriction and without any reference to RBI.

7. Joint holdings: Joint holdings is allowed in both accounts but unlike NRO account (where joint holding with Indian resident is allowed), in case of NRE account joint holder also need to be an NRI.

Thus, if you wish, you can open a NRO account jointly with your relative residing in India. But remember that in such joint accounts, the funds of resident joint holder can’t be credited.

However, for operating both of these accounts, you can authorise an Indian resident – a friend or a family member whom you trust – to operate your account by submitting a ‘mandate letter’ (most banks have a readymade format) to the bank. The mandate operates like a power of attroney (POA).

8. Exchange Risk: Unlike NRO account, NRE account is exposed to exchange fluctuation risk.

All foreign exchange remittance received for credit to NRE accounts is first converted to Indian rupees at the prevailing exchange rate. But as repatriation is allowed in foreign currency (i.e., rupee again gets reconverted into dollars), therefore these accounts are susceptible to exchange loss which is basically of two kinds.

First, is the conversion loss – there is difference between buying & selling rate of banks and this difference has to be borne by the account holder. Second, is the day-to-day fluctuations in the exchange rates.

9. Rate of interest: Returns on NRO accounts are at par with domestic accounts. In other words, interest paid on NRO savings account is same as that paid on domestic savings account (current rate is 3.50%) and returns on NRO fixed deposits are at par with that offered on domestic fixed deposits (current rates are broadly between 3% and 10% depending on the period and the bank).

Interest on NRE savings deposits are also at the same rate as applicable to domestic saving deposits (currently the interest rate is 3.5%) while interest rates on NRE term deposits are regulated by RBI and are much lower than that paid on the NRO term deposits. These rates are pegged to international (LIBOR/SWAP) interest rates and are revised by RBI from time to time.

UPDATE (Feb’ 2012): In Dec’2011, RBI deregulated interest rates on NRI & NRO Deposits. The current position is as follows:

Interest Rate on NRO Deposits: As per RBI guidelines, Interest rates on NRO & NRE accounts can be less but cannot be more than the comparable domestic deposits. Accordingly, Interest rates offered by most banks in India on both NRO Savings & NRO FDs are almost at par with domestic rupee deposits with a few exceptions.

Interest Rate on NRE Deposits: Interest rate on NRE Savings Account is similar to that offered on NRO Saving Deposits and interest rates on NRE Fixed Deposits are also more or less same as offered on Domestic & NRO Fixed Deposits. In other words, after the RBI decision to give freedom to banks in fixing of interest rates on NRE Accounts, most of the banks have aligned their interest rates on NRE Accounts with that offered on NRO Accounts. Now, the major difference between NRO FDs & NRE FDs is that unlike NRO FDs, the duration of NRE FDs cannot be less than one year. Further, No interest is payable if NRE FD is withdrawn before completion of 1 yr.

Current NRE term deposit rates are LIBOR/SWAP rates (as on the last working day of the previous month) plus 175 basis points . The relevant LIBOR/SWAP rates are published by FEDAI (fedai.org.in).Thus, rates effective from 1st December, 2008 are 4.52% ( 1-2 years), 3.87% (2-3 years) and 4.14% (3-5 years) p.a. compounded quarterly but are subject to monthly revision and are as per the guidelines issued by RBI from time to time.

Besides, unlike NRO FDs, minimum tenure for NRE FDs is one year; no interest is paid if the deposit is cancelled prematurely before I year; and rates are same across the banks (can’t exceed the ceiling rates fixed by RBI).

In a nutshell, NRE accounts offer all the facilities (except returns) of NRO accounts plus free repatriation and tax exemption (also no TDS hassles being tax free), but with the accompanied exchange risk. However, as returns are not attractive, NRE deposits are not a good investment in themselves. Rather these accounts are good as a temporary parking channel for making further investments (on repatriable basis), say, in capital markets or mutual funds.

Also see:

1. NRIs: Tax Planning

2. NRIs: Planning the Residential Status

3. Bank FDs - Interesting Interest Information