NRO v/s NRE
A Non-Resident Indian is often faced with the situation of maintaining a Rupee account in India. Primarily there are two reasons for opening such an account: NRI wants to repatriate overseas earned money back to India and/or NRI wants to keep India based earnings in India. NRI has the option of opening a Non-Resident Rupee (NRE) account and/or a Non-Resident Ordinary Rupee (NRO) account. An NRO account can also be opened by a Person of Indian Origin (PIO) and an Overseas Citizen of India (OCI).
Non-Resident External (NRE) Account:
Non-Resident External Rupee Account (NRE), an Indian rupee-denominated account in India. This account is available in savings, fixed and recurring deposits. The NRE account gives account holders high liquidity and the advantage of benefitting from investments in India. As both the principal amount and the interest earned on NRE accounts are exempt from tax in India, this account also proves to be a great way to invest earnings in instruments such as fixed deposits and stocks, and earn returns.
Non-Resident Ordinary (NRO) Account:
Like NRE accounts, Non-Resident Ordinary Rupee Accounts (NRO) are also rupee-denominated accounts. It is an account of an NRI to manage the income earned in India. Unlike NRE accounts, interest earned on this account is taxed at the rate of 30% (plus surcharge) and other applicable taxes in India according to the provisions of Income Tax Act.
In order to take the benefit of lower rates of tax as per double taxation avoidance agreement (DTAA) entered in by India, NRIs need to submit the Tax Residency Certificate issued by Tax Authorities of the country of his residence. Apart from different tax treatment, the amount of money that can be repatriated also varies. In case of NRO account, remittance outside India of current income such as rent, dividend, pension, interest, etc. and remittance up to USD one million, per financial year (April- March), are allowed for all bonafide purposes, subject to the satisfaction of the Authorised Dealer (AD) bank. This amount can be repatriated after the applicable taxes are deducted.
Repatriation:- It refers to the conversion of any foreign currency into local currency. The whole amount which includes interest and principal in the NRE account can be repatriated but incase of NRO account interest amount is repatriated and subject to conditions principal amount can be repatriated.
Taxability: NRE account is Tax-free (no Income tax, wealth tax, and gift tax) in India. On the other hand, the interest earned in NRO account and credit balances are subject to respective income tax bracket and are also subject to applicable wealth and gift tax.
Deposits: If an NRI/PIO/OCI is earning income originating in India (such as salary, rent, dividends, etc.) he/she is only allowed to deposit it in the NRO account. Deposit of such earnings is not permitted in NRE account.
Holding: NRE account can be jointly held with another NRI but not with resident Indian. On the other hand, NRO account can be held with NRI as well as resident Indian (close relative).