Difference between NRE and NRO FDs Which account should you open

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  • 1 Months ago

Written by - Shriram

The difference between Non-Resident External (NRE) and Non-Resident Ordinary (NRO) account is that one is a foreign currency account, and the other is a rupee account. A Non-Resident Indian (NRI) might prefer to hold an NRO or an NRE fixed deposit as it offers a reasonable rate of return.

You can avail of various options to open and operate a bank account outside India. These accounts may seem similar, but both have their own benefits and shortcomings. Any NRE or NRO fixed deposit account offers benefits, including tax exemptions, full repatriability, etc. Understanding the difference between NRE and NRO FDs (Fixed Deposits) will help you make well-informed decision. 

A term fixed deposit offers benefits like tax exemptions, high interest rate specially for senior citizen, guaranteed growth of money etc. Shriram offers the highest rate of interest of 8.40% (including senior citizen). Let's look at the differences and see which will suit your needs better.

NRO Fixed Deposit - Features

NRO FDs are best suited for NRIs who has a steady income coming in from India. Such payment could be from rent, commissions, fees, etc. You can open a joint NRO account with an Indian resident. Principal repatriation is not allowed because it is a rupee account. However, a limited interest can be transferred abroad.

Interest rates on an NRO FD are attractive compared to regular current and savings accounts. However, the interest rate varies according to the Non-Banking Financial Company (NBFC) or bank of your preference. It is essential to remember that an NRO FD is a resident deposit, and the interest is fully taxable in the hands of an NRI at the prevailing peak rates applicable to them. There may be an additional surcharge of 10% if the interest earned in a particular financial year is more than Rs. 10 lakhs.

NRE Fixed Deposit – Features

An NRE FD is typically a foreign currency account and is freely repatriable. You can only make an NRE deposit from the money earned outside India. NRIs looking for secure investments and repairable fund sources prefer an NRE fixed deposit. An NRE FD is available with flexible tenures from one year to ten years. Some NBFCs and banks even offer loans and overdraft facilities against an NRE FD.

Most financial institutions offer a flexible range of deposits in the case of NRE FDs. Interest rates on an NRE fixed deposit are attractive but have a foreign currency risk on the depositor. One of the best features of an NRE FD is that the interest is entirely tax-free in the hands of the person investing in the fixed deposit.

Differences between an NRE and an NRO FD:

Source of funds: Income generated outside India can be used to open an NRE account by converting it to Indian rupees. On the other hand, you can open an NRO fixed deposit with revenue generated within India. You cannot transfer funds from an NRE account to an NRO to open an FD. You cannot transfer funds abroad to start a fixed deposit from your NRO account.

Repatriation: You will not get a repatriation option on the principal investment through an NRO FD. Only the interest gained from your NRO fixed deposit can be transferred to a foreign account. However, an NRE FD offers the option of fully repatriating funds to a foreign account, including the principal and accrued interests. This way, transferring the principal and earned draws to an Indian account is simplified.

Joint Holding: Two NRIs can choose either an NRO or an NRE joint account without complications. However, if an NRI wants to open a joint statement with an Indian resident citizen, they can only opt for an NRO account. An NRE FD cannot be opened jointly with a resident Indian citizen, even if the person is a direct family member.

Tax Liability: An NRO FD attracts taxes as per Indian laws. The interest earned will be taxed from an NRO fixed deposit according to the Income Tax Act, 1961, at approximately 30%. This rate is relatively high when compared to domestic FD rates. On the other hand, an NRE fixed deposit does not attract tax on the principal interest earned from the investments. In this way, an NRE FD is tax-free. This benefit makes an NRE FD a better option when compared to an NRO, fixed deposit.

Interest Rates: The interest rate can vary for NRE and NRO FDs according to the bank or NBFC you want to invest. It is essential to keep updated on the available rates to find the best option with the highest returns. An NRE or NRO FD is offered with maturity between one and twenty years. The final decision on which FD is preferable for you depends on your preference in benefits that you can avail of from the two types of accounts.

How to decide which is the best option for you? 

The choice depends on your requirements and whether you are looking to be earning foreign flows or Indian rupee flows. It also depends on whether the NRI prefers a repatriable or non-repatriable account. Repatriability here means the funds from the account can be transferred to India and converted to rupees. 

Although the interest rate is much more attractive than regular savings accounts, you must consider the limitations. While an NRE account is not taxable, it has a risk that the exchange rate may rise or fall depending on the foreign exchange rates, and these foreign exchange rates fluctuate from time to time. An NRO fixed deposit is best for someone wanting to save their Indian earnings. Stay updated on the latest FD interest rates to make the best choice for your finances.

FAQ:

Can I deposit rent income in an NRE account?

No, the rent deposit cannot be credited to an NRE account. An NRI will have to deposit their rent income into an NRO account.

 

Is NRE deposit interest taxable?

An NRE FD is exempt from taxation. Interest earned on an NRE FD is exempt from tax in India, but TDS applies to interest earned on an NRO fixed deposit.


What is an NRE deposit? 

A fixed deposit account in which your money is converted into an Indian Rupee at the time of deposit is a Non-Resident External Account.
 

Is TDS applicable for NRE fixed deposits?

TDS is only applicable on an NRO FD. Interest earned from NRE fixed deposits is exempt from tax.
 

Key highlights:

  •  An NRO is a rupee account and an NRE is a foreign currency account.
  •  An NRE account is exempt from tax.
  •  You can open a joint NRO account with an Indian citizen.
  •  You can make an NRE account from the income generated outside India.

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