NRO vs NRE Account

by Manshu on April 18, 2011

in NRI

Updated on Jan 9 2012

A few days ago I wrote about how you could open a NRE / NRO account while still abroad, and some people had a question on which is the better among the two.

Like most other things – it depends on what your specific needs are but now the big difference in NRO and NRE accounts is that the fixed deposits that you open in your NRE account are tax free in India. Here is a list of some of the best NRE fixed deposits with Indian banks.

Here is a post with differences between the two accounts, and you can go through these main points to see which one suits you most.

Difference between NRO NRE  Accounts

1. Interest on NRE account is tax free where NRO is taxable in India: It used to be that NRE accounts paid a lower interest than NRO accounts, but recently RBI allowed banks to set up their own NRE rates, and as a result now NRE fixed deposits pay as much as a NRO fixed deposit.

The big difference is that there is no tax in India on the interest on this NRE account, so it makes much more sense to open a fixed deposit using a NRE account instead of a NRO account.

2. NRE accounts are tax free whereas NRO accounts are not: You don’t have to pay any taxes on your NRE account, but interest income on the NRO deposit is taxed in India. There was a comment the other day from a reader stating that NRO tax rates have gone down, but I can’t find confirmation of that anywhere, so if you have any information on that then please leave a comment.

3. Up to a Million Dollars is Repatriable in NRO Account: Repatriable in this context means money transferred from India to another country, and it used to be that money from a NRO account wasn’t repatriable at all.

However, RBI has made some changes and now up to a million dollars can be repatriated from a NRO account in a year. However, a friend who was trying to do this told me that it’s a bit of a hassle transferring money from NRO account when compared with a NRE account.

If you foresee the need to repatriate more than a million dollars then you should opt for a NRE account.

Conclusion on NRO NRE Comparison

A lot of NRIs need a bank account back in India because they plan to return some day in the future or they have to maintain their family still in India. So you need something back in India – either a NRO or a NRE account.

I’ve seen the rules change in such a way for these accounts that for a long time it made sense to have a NRO account but not a NRE account, and now the situation has been reversed.

When you open an account – the bank gives you an option to choose if you want to open one or both, and you should choose both at the time so that you don’t have to go through the lengthy process of submitting documents and opening a new account in case the rules change again.

Update: Deleted the tax saving line as pointed out by Satie below.

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