Difference between NRI and NRE Accounts

Key Difference: The term “Non-resident Indian” is differs from “Non-Resident External” and “Non-Resident Ordinary”, where NRI is a legal status and NRE and NRO back accounts. NRI refers to the tax status of a citizen, while NRE and NRO are different types of back accounts that are available to the NRI. A person is deemed an NRI or a Non-resident Indian when an Indian citizen stays abroad for purposes such as employment, business and vacation. NRE and NRO accounts were created specifically for NRIs, as it is illegal for an NRI to hold a resident account in India.

India, which has the second largest population in the world, is also one of the Asian countries with the highest amount of migration to other nations. This migration is fueled by various reasons such as earning more money, a better living, and a better education. Due to the high amount of migration, a big percentage of India’s income depends on money transactions from abroad or foreign money being introduced to the Indian economy. When a person of Indian origin migrates abroad, he comes into contact with terms like “Non-resident Indian” (NRI), “Non-Resident External” (NRE) and “Non-Resident Ordinary” (NRO).

The term “NRI” is differs from “NRE” and “NRO”, where NRI is a legal status and NRE and NRO back accounts. The legal definition of an NRI is that this term only refers to the tax status of a citizen, while NRE and NRO are different types of back accounts that are available to the NRI. A person is deemed an NRI or a Non-resident Indian when an Indian citizen stays abroad for purposes such as employment, business and vacation. People working for United Nation (UN) organizations or officials posted outside of India by the government are also included in the definition. A person’s liability to pay tax also depends on his residential status, as the income tax rates differs for each resident type. In order to be labeled as a resident of India, a person must fulfill certain conditions such as “the person must reside in India for a minimum of 182 days or more during the previous year or a person must reside for a minimum of 365 days or more over four preceding years.” If these conditions are not fulfilled a person is considered as an NRI.

NRE and NRO accounts were created specifically for NRIs, as it is illegal for an NRI to hold a resident account in India. These accounts allow the NRIs to deal with money matters in India, such as acquiring income from or paying income for rent, property, etc. These accounts are two different types of bank accounts that are available to NRI, and these both accounts offer different benefits compared to the other.

An NRE account is denominated in rupees, and could be a savings, current or a fixed deposit account. This account is opened by depositing money, foreign currency not rupees, in to the account. The money in the bank can be withdrawn in terms of rupees or transferred from the bank in terms of foreign currency; however, depositing money in rupees is not allowed. Also any interest acquired from an NRE account is tax free. ‘Repatriation’ or ‘sending money abroad’ in different currencies also allowed using an NRE account. Commonly, NREs are held by a single person, but it can also be jointly held if both the holders are NRIs. If any NRI returns to India for good, then the account can be converted into a normal resident back account.

An NRO account is also a rupee based account, where currency can be maintained in the form of rupees. This account can also be a savings, current or fixed deposit account and must be opened by an NRI. An NRO account allows holders to deposit the funds in rupees along with other currencies. Originally, remitting funds from an NRO account was not allowed, however terms have been changed and now allows users to remit up to a up to a million USD. One can make only local (within India) payments using funds in a NRO account. NROs can be jointly opened with other NRIs or resident Indians. Interest earned in an NRO account is not exempted from tax and will require the holder to pay taxes under RBI rules.

Originally NRO accounts were preferred compared to NRE accounts because the low interest rate given by NRE account, but now new RBI guidelines have given the power of setting interest rates to the banks, and NRE accounts gives approximately same rates as NROs. NRO accounts are not exempted from tax, while NRE accounts are. Both NRO and NRE accounts allow transferring money abroad in different currencies. Deposing currency in rupees is not allowed in NRE accounts but is allowed in NRO accounts. It is best to have both accounts as each has their own unique benefits.

Image Courtesy: trak.in, religareonline.com

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