NRE and NRO Account: Key Differences & How to Choose?
TL;DR - Summary
- What is an NRE account? - A bank account for NRIs to deposit and manage income earned outside India. Interest is fully tax-exempt and funds are freely repatriable without any limit.
- What is an NRO account? - A bank account for NRIs to manage income earned within India such as rent, pension, or dividends. Interest is taxed at 30% plus cess and repatriation is capped at USD 1 million per financial year.
- Which account should you choose? - NRE if your income is from abroad and you want tax-free returns with full repatriability. NRO if you need to manage India-based income like rent or dividends.
- What documents do you need to open either account? - Passport, PAN card, visa or residency proof, overseas address proof, and a passport photograph. Documents must typically be attested if you are already abroad.
- What is the penalty for not converting to an NRO account? - Continuing to use a resident account after becoming an NRI violates FEMA. Penalties can go up to 3 times the amount involved, plus Rs. 5,000 per day for continued non-compliance.
What is an NRE Account?
NRE accounts, or Non-Resident External Accounts, allow NRIs to deposit and manage the income they earn outside India, such as salary or business income earned abroad. When money is deposited into the account in a foreign currency, the bank automatically converts it into Indian Rupees (₹) at the prevailing exchange rate.
One of its key highlights is that these deposits are completely tax-free, that is both the principal amount and the interest earned are exempt from tax. In addition, these accounts offer full repatriability, meaning NRIs can transfer their funds abroad without any restrictions.
Imagine Rohan, based in Singapore, sends part of his monthly salary to India to support his parents and save for a future home in Mumbai.
Instead of keeping the money in a regular savings account, he deposits it into an NRE account. This allows him to earn tax-free interest on his savings in India while also giving him the flexibility to transfer the funds back to Singapore whenever needed.
What Is an NRO Account?
A Non-Resident Ordinary (NRO) account is a bank account which helps NRIs conveniently handle their India-based income, such as rent, dividends or pension, while living abroad.
Unlike an NRE account, the interest earned on an NRO account is taxable in India and is subject to Tax Deducted at Source (TDS). In addition, repatriation is restricted, with the transfer of the principal amount abroad capped at USD 1 million per financial year, subject to applicable regulations and documentation.
Now let us suppose Rohan already owns a studio apartment in Mumbai that generates monthly rental income. He also receives a pension from his previous employer in India.
While his overseas salary can be deposited into an NRE account, the rental income and pension earned within India cannot. To manage this India-based income legally, Rohan needs an NRO account.
💡 QUICK INSIGHT
When a resident's status changes to NRI, their existing savings accounts must be redesignated as NRO accounts. Continuing to operate them as resident accounts is a FEMA violation.
What are the Key Differences Between NRE and NRO Accounts?
The primary difference between an NRE and an NRO account lies in the source and purpose of the funds being managed. While NRE accounts can be used to deposit income earned outside India, NRO accounts only accept income earned within India as deposits.
Have a look at the other key differences between NRE and NRO accounts:
| Parameter | NRE Account | NRO Account |
|---|---|---|
| Purpose | Deposit international earnings in India | Manage revenue generated in India |
| Tax | Fully exempt from tax | Interest on deposits is subject to TDS. Credit balances follow the applicable income tax slabs. |
| Repatriability | Funds are completely and freely repatriable | Funds are repatriable up to USD 1 million per financial year, after payment of applicable taxes |
| Currency Rules | Deposits accepted in foreign currency. Withdrawals only in Indian rupees. | Deposits accepted in both foreign and Indian currencies. Withdrawals only in Indian rupees. |
| Eligible Sources | Salary earned abroad and income from overseas investments | Rental income, dividends, and profits from the sale of property in India or overseas |
If you earn freelance or business income from abroad, neither NRE nor NRO accounts is the ideal option. In such cases, dedicated international payment platforms like Skydo can offer better flexibility, faster settlements and smoother compliance.
How is Interest Taxed on NRE and NRO Accounts?
Tax on Interest Earned
NRE Account
Non-Resident External
0%
Tax on interest
Both principal and interest are fully exempt under Section 10(4)(ii) of the Income Tax Act.
NRO Account
Non-Resident Ordinary
31.2%
TDS on interest
30% TDS + 4% Cess. Can be reduced under a DTAA between India and the NRI's country of residence.
While the NRE account allows tax-free growth for overseas revenue, the NRO account is used to manage income earned in India and comes with tax implications.
The principal and interest earned on an NRE account are fully exempt from tax under Section 10(4)(ii) of the Income Tax Act. This makes it a preferred choice for NRIs looking to hold or invest their foreign earnings in India without any tax liability.
On the other hand, interest earned on an NRO account is taxed in India at 30% TDS + 0% Surcharge + 4% Cess. You can reduce this under the provisions of a Double Taxation Avoidance Agreement (DTAA) between India and the NRI's residence country.
💡 QUICK INSIGHT
At 31.2%, NRO TDS is one of the highest withholding rates on bank interest in India.
How to Repatriate Funds from an NRO Account?
NRO Fund Repatriation Process
Pay applicable taxes on the income
Obtain Form 15CB from a Chartered Accountant
File Form 15CA online
Submit documents to the bank
- Form 15CA acknowledgement
- Form 15CB certificate
- PAN card copy
- Passport and visa copy
- Proof of source of funds
- Recent NRO account statement
Hover or tap any step to see details
Annual cap: NRIs can repatriate up to USD 1 million per financial year from an NRO account, subject to FEMA regulations.
If you are an NRI receiving rental income in India, you can deposit it in an NRO account and then move a portion of it outside, up to the repatriation limit of $1 million per year.
This process will involve tax compliance, CA certification and bank verification. Here’s how the process unfolds:
Step 1: Pay Applicable Taxes on the Income
Banks deduct TDS on the interest earned from NRO accounts. For NRIs, the tax rate can be levied at nearly 30%, along with the applicable surcharge and cess, making it significantly higher compared to the tax deducted for resident account holders.
Step 2: Obtain Form 15CB from a Chartered Accountant (CA)
Form 15CB is a certificate issued by a CA confirming that the tax on the amount being repatriated has been correctly calculated and paid. This step is only applicable when the remittance amount exceeds ₹5 lakh during a financial year.
Step 3: File Form 15CA
Form 15CA is a self-declaration submitted online on the Income Tax Department portal to provide details of the foreign remittance and confirm that the applicable taxes on the funds have been duly complied with.
Step 4: Submit Documents to the Bank
The final step involves submitting all required documents to the bank where the NRO account is held. These generally include:
- Form 15CA acknowledgement
- Form 15CB certificate
- PAN Card copy
- Passport and visa copy
- Proof of source of funds
- Recent NRO account statement
The bank will then verify your documents, check FEMA limits and process the transfer. You will receive confirmation once the remittance is completed.
Looking for a simpler alternative? Skydo allows you to receive payments directly, without dealing with NRE and NRO accounts, Form 15CA/15CB or additional bank charges!
What Documents are Required to Open an NRE or NRO Account?
To open NRE and NRO accounts, you need to submit a copy of your passport, PAN card, visa, work permit or permanent residency card, one passport photograph and proof of overseas address.
However, before you start, verify with your bank to determine their exact criteria and what documents qualify for each.
If you are already residing abroad, your documents must typically be attested by the Indian embassy, a notary, or an authorised official of an Indian bank branch.
How to Choose Between an NRE and an NRO Account?
If you are wondering which is better to choose between the NRE and NRO accounts, the answer depends on your income source and financial goals. Have a look at the table below to evaluate which account best suits your needs:
| NRE Account Choose if you... | NRO Account Choose if you... |
|---|---|
|
|
What is the Penalty for Not Converting to an NRO account?
If you plan to leave India for employment, business or other reasons, you should designate the savings account you are using now as an NRO account. Continuing to operate a resident account as an NRI can lead to non-compliance with the Foreign Exchange Management Act, 1999.
Penalties for such violations can be severe. They may go up to 3 times the amount involved or ₹2 lakh if the amount cannot be determined. In case of continued non-compliance, an additional penalty of ₹5,000 per day may be levied until the issue is resolved.
How Skydo Helps
An NRE account is the best option if you want to handle overseas revenue with unlimited cash transfers and tax-free interest. However, an NRO account is better if you need to manage Indian revenue and do not mind the repatriation restrictions.
However, you can also transfer overseas funds in India without NRE and NRO accounts. Skydo makes it easier for Indian freelancers and businesses to receive money from other countries by giving them virtual foreign currency accounts in USD, EUR, GBP, CAD and so on. This helps to cut down the high SWIFT fees and delays.
So open your Skydo account today!
Can I transfer money from my NRE account to an NRO account?
Yes, you can transfer money between NRE and NRO accounts. However, you can only do so up to USD $1 million a year as per the RBI regulations.
What are the main disadvantages of an NRE account?
Is TDS deducted on the NRO account interest and can I claim it back?
What happens to my NRE and NRO accounts when I return to India?
Can I hold both an NRE and an NRO account at the same bank?
