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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 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 arent 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 cant 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 cant be remitted abroad freely (i.e., cant 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 cant 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. 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 (cant 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. 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

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7 responses to "NRI Bank Accounts Difference Between NRO & NRE"


1. Ramgp | August 29, 2009 says: Dear Sirs, By opening NRO account (for the purpose of depositing local currencies) if money is non-repatriable,then it is better to have ordinary savings account. Is it illegal to have opened Savings account by Non-resident Indian? if so how to manage if one becomes non-resident for initial period for some years and resident for later period and then again becoming non-resident thereafter? Can anyone enlighten me please? 2. Fisher | August 29, 2009 says: First, know that youre allowed to repatriate USD one million every year from your NRO account.

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