The Differences between NRE and NRO accounts:
- Repatriation: NRE account is freely repatriable (Principal and interest earned) while the NRO account has restricted repatriability i.e permitted remittance allowed from NRO is up to USD 1 million net of applicable taxes in a financial year after giving undertaking along with a certificate from a chartered accountant.
- Tax Treatment: 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.
- Deposit of Rupee funds generated in India: 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 NRO account. Deposit of such earnings is not permitted in NRE account.
- Joint Holding: NRE account can be iointly 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) as defined under Section 6 of the Companies Act 1956.
Choose NRE accounts if you: (Primary reason) want to park your overseas earnings remitted to India converted to Indian Rupees; want to maintain savings in Rupee but keep them liquid; want to make a joint account with another NRI; want Rupee savings to be freely repatriable.
Choose NRO account if you: (Primary reason) want to park India based earnings in Rupees in India; want account to deposit income earned in India such as rent, dividends etc; want to open account with resident Indian (close relative)
NRE bank accounts are accounts that hold repatriable money. That is, money in such accounts can be converted back to a foreign currency. NRO bank accounts, on the other hand, are accounts that hold non-repatriable money. Money in NRO accounts will stay as Indian rupees and cannot be readily converted back.
If an investor has a choice, we would recommend using an NRO account for their mutual fund investing. The reason for this is the documentary requirements for operating an NRO linked mutual fund investing is less than that for an NRE account. Since money in NRE accounts are repatriable, mutual fund companies often ask for bank statement proof for every transaction to show that the money indeed did originate from an NRE account (FIRC rules). With an NRO account, there are no such requirements.
A note about mariners: One frequent question mariners have is with regards to their overseas address proof. Since they are in ships, it is difficult for them to produce one. the Continuous Discharge Certificate (CDC) issued by their employer is an acceptable proof for their overseas address for KYC purposes. They can also use their NRE/NRO bank account statement as proof for this purpose.