Thursday, April 21, 2016

What is difference between NRI and NRE account?

This is one of the frequently asked questions from NRIs, main from those who have not yet opened any saving account in India. NRIs (Non-Resident Indians) can open different types of bank accounts in India e.g. NRE (Non Resident External), NRO (Non Resident Ordinary), FCNR (Foreign Currency Non-resident), or RFC (Resident Foreign currency). All of them are casually called NRI accounts because only NRIs can open them.


So main difference between NRI and NRE account is that formerly refers to all kinds of bank accounts which can be opened by NRIs, including saving and fixed deposit, but NRE is a special type of NRI bank account which has some restriction on what kind of money you can deposit (foreign currency or money transferred from another NRE account) but also have preferential benefit on income tax as interest earned on NRE accounts are tax-free in India


In the past, I have shared many articles on different types of NRI accounts and I strongly suggest any NRI to read those to learn more about different features, and pros and cons of different NRI accounts. Here, I'll list down the key points related to each of those four types of NRI bank accounts mentioned at the start of this article i.e. NRE, NRO, FCNR, and RFC




NRE (Non Resident External) Account

This is a bank account which allows you to keep your overseas income on Indian currency i.e. INR. You can open NRE saving, current or fixed deposit. A key feature of NRE bank account is that you can only deposit freely tradable foreign currency into this account e.g. you can remit money to fund your NRE account, or you can use travellers cheque while visiting India, or you can transfer Indian currency from another NRE account. The bottom line is the source of the fund must be abroad. 

One of the main reason why many NRIs open NRE saving account or NRE fixed deposit is the tax benefit, interest earned on both NRE saving and fixed deposit is completely tax-free in India. They are not even added into your taxable income, so it doesn't matter if you are earning more than 2.5 lakhs as interest on NRE account, which is more than basic exemption limit of income tax in India. 

Another key benefit of opening NRE saving account or fixed deposit is that both principle and interest are freely repatriable. You don't need to take any permission before sending money from NRE account to overseas. Other NRI accounts e.g. NRO has both limit and approval process before sending money to overseas. 



NRO (Non Resident Ordinary) Account

Allows to keep money in INR but added benefit is that source of fund can also be India. You need NRO account if you have income generated in India e.g. rental income from flats or properties, royalty or services offered in India. It doesn't have same tax benefits enjoyed by NRE account as interest is taxable at a higher rate of 30.3% but you can ask for a lower rate by exercising DTAA option. 

DTAA stands for Double Tax Avoidance Agreement and if the foreign country you are currently leaving and earning has signed the DTAA treaty with India then you don't need to pay tax in both countries. You can even claim tax rebates if the tax is already paid in the foreign country. See this article learn more bout how to use DTAA to avoid paying a higher tax on NRO fixed deposits.




FCNR (Foreign Currency Non Resident) Account

The FCNR account allows you to keep your fund in foreign currency to avoid foreign exchange risk but at the same time enjoy higher interest rates compared to local foreign banks. You can only open FCNR account as fixed deposit and different bank offer FCNR deposit on different foreign currency. E.g. almost all banks allow FCNR deposit in USD but there are few banks e..g Axis bank which allows you to open FCNR deposit with SGD or HKD. 

Major advantages of FCNR account is less risk and more interest rate. You don't  need to pay any currency conversion charges as well, which is always applied when you remit money to India for depositing on NRE accounts and then send back to overseas by converting INR to USD or other foreign currency. 



Here is also a nice table to compare various features of different types of NRE accounts e.g. NRE, NRO, and FCNR accounts.

What is difference between NRI and NRE account?


RFC (Resident Foreign Currency Account)

This is an NRI account for returning NRI, who can park their foreign currency fund into this account. When they become NRI again they can remit this fund back to overseas. They can also use the fund in this account to support their childer's education in overseas. See this article to learn more about RFC account.


That's all about the difference between NRI and NRE account. You can see that Indian banks allow NRIs to open different types of NRI accounts e.g. NRE, NRO, FCNR, and RFC for their different needs. Each account has their own benefits and purpose and you should open depending upon your need.

6 comments:

  1. Thank you for sharing such great information. It is very informative, if can you help me in finding out more detail on NRI Banking , i am interested and would like to know more about this field and wanted to understand the basics of NRI Banking Services.

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  2. I want to ask you about the total asset in RFC account will be taxable after 2 years or only interest will be taxed if nri permanantly returned to india.Another thing i want to ask if NRI comeback permanatly to india and he has suppose 50 lakhs rupees amount in his NRI account and he is not fullfilling criteria to open RFC account ,the whole 50 lakhs amount will be taxable?

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    Replies
    1. Hello Ahmed, only interest will be taxable after 2 years in RFC account because you have already paid tax on principle. Regarding your second question, it all depends upon the residential status of returning NRI. If he is RNOR then he can keep the NRE account until he become a resident Indian from tax perspective. Until he is RNOR, he don't need to pay tax on interest earned on NRE, FCNR or any overseas bank account. See this article to check how residential status of returning NRI is calculated.

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  3. Thanks for reply .Iam confused regarding financial year.See here is my stay in india as per the financial year and suppose i will stay in india in the year 2017-2018 morethan 6 months or if i will come and stay permanently after 1 april2017 ,what would be my status of nri acconts and fcnr?Financial year days in india
    1april2016-31march2017 42
    1april2015-31march2016 16
    1april2014-31march2015 38
    1april2013-31march2014 67
    1april2012-31march2013 235
    1april2011-31march2012 43
    1april2010-31march2011 48
    1april2009-31march2010 0
    1april2008-31march2009 30
    1april2007-31march2008 41
    1april2006-31march2007 52
    1april2005-31march2006 21
    1april2004-31march2005 19
    1april2003-31march2004 0
    1april2002-31march2003 67
    thanks.

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    Replies
    1. Hello Ahmed, please use this flowchart to find your residential status.

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