Non-Resident Indian often gets confused when the situation of maintaining a Rupee account in India arises. Mainly there are two reasons for creating such account: NRI wants to remit money which is earned abroad back to India and/or NRI wants to keep income earned in India itself.

Comparing NRE and NRO accounts

If a person is a Non Resident Indian (NRI), he can open two kinds of account in India - a non-resident rupee accounts (NRE), and non-resident ordinary rupee accounts (NRO). Let?s see in detail what these accounts are about.

What does a NRE account mean?

Only rupee denominations can be maintained in this type of account. The account can be created in the names of two or more NRI?s and all the account holders should be of Indian nationality or origin. Amount held in the NRE account are freely repatriable and you cannot send money by any other means except as remittance from overseas. NRE account can be held as savings, current, recurring or fixed deposit accounts. These accounts can be created only by the NRI himself also jointly with Indian residents but cannot create it through any power of attorney.

Tax Assessment

Accumulated interest income and balances held in NRE accounts do not attract any kind of taxes like Income tax and Wealth tax, respectively

Rate of Interest

Banks are free to regulate the interest rates of savings and term deposits of maturity of one year and more. Interest rate which is offered by banks on NRE deposits cannot be more than those offered by them on comparable domestic rupee deposits.

What does NRO account mean?

NRO accounts are also created in the form of rupee denomination could be in the form of current, savings, recurring or fixed deposit accounts. The account can be held jointly by NRI?s but not Indian residents. You can transfer money into an NRO account from any of your other account - even other people residing in India can transfer funds into an NRI's NRO account.

Rate of Interest

Banks are free to regulate their rate of interest on savings deposits under Ordinary Non-Resident (NRO) Accounts. None the less, interest rates offered by banks on NRO deposits cannot be more than those offered by them on comparable domestic rupee deposits. Tax is deducted at source in NRO accounts, unlike NRE accounts. However, funds from NRO to NRE accounts can be transferred, vice- versa.

Comparing NRE and NRO accounts:

1. Repatriation: NRE account is freely repatriable (Principal and interest earned) while the NRO account has restricted repatriability i.e permitted remittance allowed from NRO is up to USD 1 million net of applicable taxes in a financial year after giving undertaking along with a certificate from a chartered accountant.

2. Taxation: NRE account is Tax free (no Income tax, wealth tax and gift tax) in India. On the other hand the interest earned in NRO account and credit balances are subject to respective income tax bracket and are also subject to applicable wealth and gift tax.

3. Deposit of Rupee funds generated in India: If an NRI/PIO/OCI is earning income originating in India (such as salary, rent, dividends etc.) he/she is only allowed to deposit it in NRO account. Deposit of such earnings is not permitted in NRE account.

4. Joint Holding: NRE account can be jointly held with another NRI but not with resident Indian. On the other hand NRO account can be held with NRI as well as resident Indian (close relative) as defined under Section 6 of the Companies Act 1956.