Difference Between NRI and NRE Account

In India, the term Non-Resident Indian (NRI) is commonly used to refer to individuals who live outside of the country. While there is no specific law that defines the visa status of NRIs, the Income Tax Act of 1961 does shed some light on this.

According to Section 6 of the act, an Indian citizen is considered a resident of India provided that they have stayed in the country for at least 182 days in the previous fiscal year or 60 days in the current year and at least 365 days in the last 4 years. Those who do not meet a minimum of two conditions of these criteria are classified as NRIs for the previous fiscal year.

In this article, we will explore the concept of NRI and NRE accounts, shedding light on their features to help you make an informed decision.

Understanding NRI Accounts

To open an NRI account in India, individuals must meet certain criteria. They should either not be Indian citizens or, according to the Income Tax Act of 1961, must have spent at least 120 days outside of India in a specific year and resided in the country for less than 365 days in the past 4 years combined. Yet another way to become an NRI is through employment abroad, which immediately grants NRI status.

NRI accounts can be divided into 3 primary categories - NRE (Non-Resident External), NRO (Non-Resident Ordinary), and FCNR (Foreign Currency Non-Residential) accounts. Each account has its own unique characteristics — understanding them is crucial when comparing NRI vs. NRE accounts.

NRE Account

The NRE account, which stands for Non-Resident External accounts, allows NRIs to deposit earnings originating from their current country of residence, provided that the funds are denominated in Indian Rupees. For instance, if an individual working in a European country sends 4,000 Euros every month, to support their parents in India, the converted amount based on the exchange rate and denominated in Indian Rupees will be deposited in the NRE account.

Key Features of NRE Account

• The deposited amount is tax-free and can be repatriated
• Permits foreign currency transfer with the balance held in Indian Rupees
• Get up to 4.35% interest per annum on NRE deposits

NRO Account

An NRO account, or a Non-Resident Ordinary Account, accepts income originating in India and holds it in Indian currency. This account is suitable for NRIs who receive dividends, rent, pension, or returns on equity investments in India. It’s worth noting that as the deposits are denominated in Indian Rupees, no currency conversion is required in this case.

Key Features of NRO Account

• Withdrawals can only be made in the Indian currency
• Get interest of up to 5.5% per annum on NRO deposits
• The repatriation limit for each financial year is USD 1 million 
• Foreign currency deposits are converted into INR as per the prevailing conversion rate
• Handles all earnings from Indian sources

FCNR Account

An FCNR account, or a Foreign Currency Non-Residential Account, allows NRIs to deposit money in foreign currency which is then denominated in the currencies prescribed by the Reserve Bank of India (RBI). The eligible currencies include CAD, SGD, EUR, GBP, HKD, USD, CHF, AUD, and JPY.

If one earns in any of these currencies, there is no need for conversion. However, if the earnings are in a different currency, they will be converted into one of the RBI-prescribed currencies.

Key Features of the FCNR Account

• The deposited amount and the interest earned are repatriable
• The deposits are non-taxable in India
• Deposits have a tenure range of 1-5 years — the account automatically renews upon maturity
• An individual can hold the account in various denominations

What are the Benefits of NRI Accounts?

Here are the benefits that you can enjoy with an NRI account besides the ease of making money deposits -

1. Repatriation: NRI accounts allow for the free flow of funds. Both NRO and NRE accounts enable the movement of money, with NRE accounts allowing for full repatriation of both principal and interest. In contrast, NRO accounts first deduct taxes from the principal before allowing the remaining balance to be repatriated.
2. Tax Benefits: Another key advantage of NRI accounts is the tax benefit that they offer. With that said, it’s crucial to understand the tax benefits of different accounts to make an informed decision. For instance, deposits in NRE accounts are not taxable in India, while NRO accounts are subject to tax regulations. However, funds deposited in an NRO account can be transferred to an NRE account after deducting taxes.
3. Minimum Balance: The minimum deposit balance limits for NRI accounts are easy to achieve. Most banks require a minimum balance of INR 10,000.
4. Convenience: You can now easily open NRI accounts. The whole process can be done online without the need to visit an Indian branch of the bank. By simply filling out an online form, attaching the required documents (self-attested), and sending them via courier, individuals can easily open an NRI account.
5. FCNR Deposit: With FCNR accounts, individuals can deposit and hold funds in foreign currencies, earning interest in those denominations. This money is not taxable in India.

Diving into the Differences Between NRI Accounts

Let's now compare the 3 types of NRI accounts to gain a better understanding of their features through some major differences -

NRE vs. NRO

• Purpose: NRE accounts are used to deposit earnings from the NRI's current residing country, denominated in INR. NRO accounts, on the other hand, manage earnings from Indian income sources.
• Repatriation: NRE accounts allow for full repatriation of funds, while NRO accounts permit full repatriation of interest and partial repatriation of the principal (up to 1 million USD per fiscal year).
• Tax Benefits: NRE accounts exempt the entire fund (principal and interest) from income tax, while under NRO accounts, taxes are deducted from both the principal and the interest.
• Joint Account: NRE accounts require both account holders to be NRIs, while NRO accounts allow NRIs to open a joint account with an Indian resident or another NRI.
• Conversion Rate: NRE account balances are affected by the current conversion rate, which is not the case with NRO account balances.

NRE vs. FCNR

• Deposit Denomination: NRE accounts hold deposits in INR, while FCNR accounts accept deposits in RBI-prescribed currencies as mentioned earlier.
• Type of Accounts: NRI and NRE accounts can open fixed deposits, savings, and current accounts. FCNR accounts, meanwhile, allow only fixed deposit accounts with a maturity period ranging from 1 to 5 years.
• Purpose: NRE accounts accept deposits of earnings from the NRI's current residing country, denominated in INR. FCNR accounts allow deposits of earnings from the NRI's residing country, denominated in one of the RBI-prescribed currencies.
• Tax Benefits: Under NRE accounts, the entire fund is exempted from income tax, whereas only the interest earned in FCNR accounts is tax-exempt.

NRO vs. FCNR

• Tax Benefits: Under NRO accounts, tax is deducted from both the interest and principal, while FCNR accounts only deduct tax from the interest earned. 
• Repatriation: NRO accounts allow partial repatriation of the principal (up to 1 million USD per fiscal year) and full repatriation of the interest. FCNR accounts, on the other hand, permit full repatriation of the entire balance.
• Currency Denomination: NRO accounts maintain the balance in INR, while FCNR accounts hold funds in the prescribed currencies by RBI.
• Joint Account: NRO accounts can be jointly opened with an NRI or an Indian resident, whereas FCNR accounts can only be jointly opened with another NRI.
• Purpose: NRO accounts are opened to manage earnings from Indian income sources, while FCNR accounts are primarily used to deposit earnings from the NRI's country of residence.

Eligibility Criteria for NRI Accounts

To be eligible to open NRI and NRE accounts, individuals must fall into one of the following categories - 

• Students pursuing education and degrees in foreign countries
• Individuals who own a business, practise a trade, or are employed abroad
• Government employees holding diplomatic passports
• Individuals employed in oil rigs, overseas shipping firms, the Indian Navy, or foreign country-registered airlines which require them to reside outside of India for 182 days or more

Which Documents are Needed for NRI Accounts?

When opening an NRI account, certain documents are typically required -

• ID proof - A passport copy
• Valid PAN or Form 60
• Visa permit (employment visa, work permit, residence visa, o student visa)
• Address proof (as mentioned in the application)
• Bank application form
• Photographs
• A cheque or draft of the initial deposit

To Conclude

Non-Resident Indian accounts play a crucial role in helping individuals residing outside India manage their funds. Understanding the differences between NRI, NRE, and NRO accounts is essential for making the right choice based on individual needs and circumstances.

NRI accounts offer benefits such as repatriation of funds, tax advantages, and convenience in managing finances from abroad. By considering the features and nuances of NRI accounts, individuals can make informed decisions about their banking needs.

The simplified process of opening NRI accounts, coupled with low minimum balance requirements, makes it easier than ever for NRIs to effectively manage their finances while residing overseas!