Under the Foreign Exchange Management Act or FEMA, specific rules in India prohibit Non-Resident Indians or NRIs from holding savings account in India. However, given the increasing amount of remittances from countries in the Middle East to states from the South and East of India, NRI account holders need to mandatorily convert their savings to either a Non-Resident External (NRE) or Non-Resident Ordinary Rupee (NRO) accounts.
Each of these accounts has its advantages and disadvantages. All NRI account opening exercises must adhere to either of these two primary types. Depending on the needs of an individual, it is possible to open either an NRE or an NRO account in any financial establishment in India.
What are NRE and NRO accounts?
Simply put, these are substitute account types which NRIs can use given the caveat that they cannot open and operate a general savings account in India. Both these types of NRI account opening and operations are Indian rupee-denominated and can be operated as either a savings, current or recurring account, besides being operable as fixed deposits. The FD rates in India are considerably higher in India, and they offer better returns in the long run. Fixed deposits also help you fund your dream vacations, apart from providing financial safety for the future.
NRE account is opened by an NRI who wants to perk his/her foreign income in Indian currency. Simultaneously, a NRO account can also be opened when the NRI generates income in INR from within the country like rents, deposits, etc.
Both the account types arrive with the option to avail an international debit card during NRI account opening, which helps in cash withdrawals 24 x 7. Also of note is the fact that the NRO account can be opened in conjunction with a resident Indian. In the recent past, many NRE account holders have chosen to open an NRO account because the fund transfer process is easy and intuitive.
Both the accounts will yield decent returns in longer durations. However, all NRO returns are subject to Tax Deducted at Source or TDS.
Comparison between the two account types
NRO and NRE accounts vary considerably when minute details are taken into account. While the NRI account opening processes are almost identical, many features are contradictory.
Here are some vital points when NRE and NRO accounts can be differentiated.
Repatriation: Under the current provisions, no NRO account holder can repatriate more than USD 1 million every year. This amount too is subject to scrutiny by a Chartered Accountant. However, NRE account holders do not have any such restriction.
Joint account holding features: A joint NRE account can only be opened when both the parties are NRIs. However, an NRO account can be held with a present resident of the country. It can also be jointly operated with an NRI.
Cash withdrawal: Both the accounts are eligible for deposits and withdrawals in Indian currency.
Since many migrant workers from India use these accounts, savings is on the mind of those who repatriate funds. Usually, these savings are held in the form of fixed deposits. These instruments are offered by all financial establishments in India, including NBFCs like Bajaj Finance.
All account holders can use a fixed deposit calculator to determine the rate of returns, and also the total amount earned before going forward with the investment.
In many calendar years, FD rate is higher, while it may vary in other periods. These are thus ideal gifting appreciating assets to one’s loved ones.
Benefits of NRE and NRO accounts –
Several benefits accompany these two types of accounts, which are as follows.
Ease of use: Since deposits and withdrawals are possible in rupees, these accounts can be operated from abroad, and profits that an NRI gathers in specific periods can be repatriated back to India.
Makes citizenship redundant: Even if the account holder is not a resident of India, he or she can still open and operate an account in India.
Relatively risk-free: Studies show that most NRE and NRO accounts are opened for savings. Some are also later used to invest in fixed deposits given the higher FD rates These accounts are relatively immune to market volatility.
Helps avoid double taxation: Both these accounts offer reduced tax liabilities thanks to the rules of DATA (Double Taxation Avoidance Agreement).
Taxation and the two NRI accounts
An NRE account is tax-exempted, regardless of whether it is income tax, gift tax or wealth tax. However, the interest that accumulates in NRO accounts is subject to the respective wealth and gift taxes, and all income tax brackets are maintained.
Individuals going for either of the NRI account openings must have a clear idea of rules that they are required to follow when maintaining this account. They can make the most of such accounts by undertaking risk-free investments like fixed deposits. They must, however, know how to choose the best FD plan in 2019 to make the most of these investments.