You must have heard about NRE (Non-Resident External), NRO (Non-Resident Ordinary) and FCNR (Foreign Currency Non-Repatriable) accounts if you have ever lived as an NRI. There are many RBI rules and regulations when it comes to maintaining the funds from various sources.
When people go to other countries on work permits and change their status to Non-Resident Indians, they often get confused when it comes to choosing a perfect account to manage their earning and savings. Therefore, having detailed information about the available account options helps to make an informed decision. How do you choose the correct account? off-course when you compare them with each other. We will do the same thing in this article i.e. we will compare NRE, NRO, and FCNR in simple terms and find out which suits best for whom?
1. Non-Resident External (NRE)
An NRE account is a bank account opened in India in the name of an NRI. This account is opened to park foreign earning.
The interest earned on NRE account is exempted from the income tax. This includes interest earned on the FD made in this account. All your balance in this account is exempted from the tax.
You can deposit money earned in foreign countries only and income generated in India cannot be kept in this account.
You can have a joint account but only with another NRI person in the NRE account.
Your balance along with interest earned in the NRE account is open to repatriation i.e. you can transfer these amounts to a foreign account.
Any foreign currencies can be deposited to the NRI account but the balance is maintained in INR currency. Also, withdrawal is only possible in INR currency.
When Do You Need an NRE Account?
An individual would require an NRE account if he/she is earning in a foreign country and falls under NRI criteria. As money deposited in the NRE account with interest earned is exempted from tax, it is wise advice to keep all your FD in the NRE account to get maximum return.
NRE account makes life easy in managing the money earned outside the country hassle-free. So, if you are an NRI then get the NRE account opened and park foreign earning in this account for tax-free returns. In a nutshell, the NRE account can be opened if you want to transfer your foreign income to India and want to avoid taxation liabilities.
2. Non-Resident Ordinary (NRO)
An NRO account is a bank account opened in India in the name of Non-Resident Indian i.e. NRI. NRO account is opened to deposit the money earned in India. It could be your pension, dividends, or property rent.
Interest earned in NRO account is taxable i.e. 30% according to the Income Tax Act 1961.
Unlike the NRE account, in NRO you can deposit money earned in foreign countries as well as money earned in India.
When it comes to repatriating i.e. transfer money to a foreign bank account, there is a cap of 1 million US Dollars on principle amount however interest earned in the NRO account is fully transferable.
You can open an NRO joint account with an Indian resident i.e. who is not an NRI.
In NRO, deposit and withdrawal can only be made in INR currency.
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When Do you Need an NRO Account?
NRO account becomes essentials if you have given your property in India on lease and receiving rents regularly. You could have invested money in the stock market when you were in India and now receiving dividends on your holdings or you’re receiving a regular pension from old Job.
Since money earned in India is taxable, it is mandatory to have an NRO account to park earned money in India. You might don’t need one if you are not earning anything in India. Since interest earned in the NRO account is taxable therefore, it is not recommended to transfer your foreign earnings in this account.
I hope, above two account types for NRIs are clear and will help you to make an informed decision. These two accounts should be enough for most of us but there a third type account available for NRIs i.e. Foreign Currency Non-Repatriable (FCNR).
Foreign Currency Non-Repatriable (FCNR)
An FCNR account is a bank account opened in the name of Non-Resident Indian or Person of Indian Origin (PIO).
FCNR account is used to transfer the foreign fund in the same currency, unlike NRE or NRO where the amount gets credited in INR currency. Mostly banks book FCNR deposits in the following six currencies.
- US Dollars (USD)
- Pounds Sterling (GBP)
- Euro (EUR)
- Japanese Yen (JPY)
- Australian Dollars (AUD)
- Canadian Dollars (CAD)
Principal amount and the interest earned in FCNR account is fully exempted from the tax.
The minimum duration of fixed deposit is applicable on FCNR i.e. minimum duration is 1 year and the maximum is 5 years. Premature withdrawals are subjected to penalties.
You can have a joint FCNR account but only with another NRI.
Full account balance along with the interest earned in the FCNR account can also be freely repatriated. You can transfer money from the existing NRE account to the FCNR account.
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When Do You Need An FCNR Account?
It is an ideal option if you want to invest your foreign earning in India safely without the risk of the exchange rate fluctuations. Keeping money in the NRE account is subject to the risk of exchange rate fluctuations however, this risk is not the case for the FCNR account.
You can keep your money in the FCNR account and enjoy the fully tax-free and higher interest rates. In a nutshell, consider opening an FCNR account if you are unsure of where to save or hard-earned money and still want to enjoy the tax-free returns from the Indian banks.
I hope, the difference between NRE, NRO and FCNR account is clear now and it would be helpful for you to choose one which fits your needs. Let me know if you still have any confusion?