NRE vs NRO Demat Account: Meaning, Differences, Importance

Are you an NRI? If yes, you may be concerned about Non-Resident External (NRE) or Non-Resident Ordinary Rupee accounts. Legally, they are essential to you as an NRI. Upon achieving the NRI status, you are not allowed to park your money in regular resident savings accounts in India as per the Foreign Exchange Management Act (Fema).

Therefore, it is mandatory that an NRI has knowledge about the difference between NRE and NRO accounts, as well as know the importance of NRE & NRO accounts. Thus, in this article, we will explore in detail what NRE and NRO accounts are, the difference between NRE and NRO accounts and their importance.  

What is an NRE Account?

The NRE (Non-Resident External) account is where you keep foreign currency earned in Indian rupees. It's an account in Indian rupees that offers total security. You can set up an NRE account as a current, savings, fixed deposit, or recurring.

The purpose of this account is to convert foreign currency into INR. Whenever someone deposits foreign money into their NRE account, it's converted to INR right away. You can also transfer interest and principal from an NRE account to a foreign account. However, it is important to clarify that the amount deposited into an NRE account must be earned outside of India.

Additionally, it is also possible to open a joint account, but only if the joint account holder is an NRI. Moreover, the interest earned on the NRE account deposit is tax-exempt. Thus, both the principal and interest amounts are tax-free.

Furthermore, having an NRE account allows you to transact and withdraw money 24x7 through international debit cards. It's also easier to invest if you link your NRE account number to your investment account. In India, NRE accounts are mostly used for personal banking, business accounts, and investing.

What is an NRO Account?

NRIs in India have NRO(Non- Resident Ordinary Rupee) accounts to manage their income earned from several sources in India, like pensions, dividends, rental income, etc. You can deposit and manage rupee funds without a problem. Also, the main advantage of an NRO account is that you can receive foreign or Indian currency.

You can open an NRO account jointly with an Indian resident or an NRI, and transfer money from their NRE account. However, the main difference between NRE and NRO accounts is the withdrawal currency. An NRO doesn't let you transfer money freely.

The interest earned on deposits in an NRO account is deductible at source at 30%, unlike that earned on deposits in an NRE account. Once the applicable taxes have been paid, persons living outside India can send up to $1 million in a year. Thus, the NRO account is suitable for people with income from India.

The following example can make you clear on the difference between NRE and NRO accounts. Let's assume an individual named Shyam is a Non-Resident Indian(NRI) living in the USA. He has a good job and a well-settled life there. And in India, he has a dependent brother. Shyam needs to take care of his brother. Therefore, Shyam transfers money to his Non-Resident External (NRE) account regularly. Additionally, his Non-Resident Ordinary (NRO) account gets credited on time. 

However, there are more differences between NRE and NRO accounts. In the next section, let’s understand the difference between NRE and NRO accounts in detail.

Difference Between NRE and NRO account

Here is the difference between NRE and NRO demat accounts:

Purpose

In order to transfer overseas profits to India in Indian rupees, one can utilise an NRE account like a bank account. An NRI can manage their income in Indian rupees obtained in India by opening an NRO account and using it as a savings account. Pensions, rental income, dividend income, etc. are examples of this.

Repatriability

The interest accrued on any contributions made to an NRE account is also completely refundable. Limits on repatriation apply to NRO accounts. After paying all necessary taxes, you can repatriate up to USD 1 million from an NRO account every fiscal year.

Taxability

Income tax is not applied to any deposits made to an NRE account. This covers both the principle sum and any accrued interest. On the other hand, Tax Deductible at Source (TDS) is applicable to the interest generated on an NRO account.

Holding an Account

Two NRIs or an NRI and an Indian resident can jointly have an NRE account. Along with an Indian citizen or other NRIs, an NRI can create an NRO account.

Money Transfer

A transfer of money between NRE accounts is possible. They may be transferred from both an NRO account and an NRE account to a resident.  Only NRO accounts and resident accounts—not NRE accounts—can accept transfers of money from NRO accounts.

Foreign exchange risk

Exchange rate risks, such as alterations and conversion losses/gains, have an impact on NRE accounts. While less susceptible to daily exchange rate swings, an NRO account is not necessarily risk-free because foreign income can also be moved to an NRO account.

Suitable Condition

You should register an NRE account if you want your foreign earnings to be paid in Indian rupees. Another advantage of NRE accounts is that they keep your funds accessible.Get an NRO account if you wish to save your income from India in that currency. Rent, income, dividends, or the sale of a house are all examples of earnings. 

What Are the Charges for NRO Demat Accounts?

NRIs must pay three different kinds of NRO Demat account charges in general. They consist of:

• Fees for creating an account
• AMC (account maintenance charges) 
• GST (goods and services tax)

Banks and brokerages differ in the first two. The account opening fees range from INR 300 to INR 4,000, while the account maintenance charges (AMCs) range from INR 75 to INR 500. The GST is also charged at a rate of 18%. 

Importance of NRE & NRO Demat Account

A Non-Resident Indian (NRI) is prohibited by RBI regulations from opening and operating a conventional resident Savings Account. In addition, any account must be changed into an NRI Account by the bank prior to obtaining NRI status. To conduct any financial transactions in India, an NRI must open a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account. The NRI/PIO may choose to create either an NRE or NRO Account, or perhaps both, based on their transactional needs.

Benefits of NRO Demat Account

You can create an NRO (savings/current) account with the intention of carrying out legitimate transactions with INR as the currency.

Upon notifying your bank of your NRI status and providing the necessary documentation, your bank may convert your current savings or current account into an NRO account (Non-resident Ordinary Rupee Account). The following details on the characteristics, advantages, and benefits of an NRO account:

• Any money you had before relocating abroad can be deposited into this account. In a similar manner, you may deposit money into this account from various sources in India, such as rent, dividends, etc. You can even transfer money from your NRE account or from abroad. Therefore, Indians who had assets and income in India before relocating to another nation are most qualified for this account.
• Additionally, you can register a joint NRO account on a former or survivor basis with an Indian resident. Additionally, you can mandate a resident Indian (provide power of attorney to a person residing in India) to assist you in carrying out all banking and account-related actions for your NRO Account. 
• Except for NRIs and PIOs, balances in NRO accounts cannot be repatriated overseas for more than US$1 million.

Benefits of NRE Demat Account

To deposit money made in other nations back into India, utilise an NRE account.  The following details on the characteristics, advantages, and benefits of an NRE account:

• Your NRE Savings account balance is entirely remittable. You are able to transfer money (including principle and interest amount) whenever you choose from India.
• You will have greater economic control over your financial fortune since the interest you generate on the money in your NRE account won't be taxed in India. However, depending on the local tax laws in your place of residence, you could or might not pay taxes on this interest there.
• An NRE account is kept in Indian Rupees, much like an NRO account. The main purpose of this account is to credit money that has been transferred from an international account.
• You may designate a local Indian to manage your NRE account, much as NRO accounts. However, only an NRI or a resident Indian relative can create a joint NRE account with you. 
• You may simply invest money in Indian investment instruments if you link your NRE account with a trading and investment account.
• An additional benefit is having access to your money at any time utilising the international debit card.

Conclusion

Knowing the difference between NRE and NRO demat accounts is essential for NRIs. NRE accounts let you keep and convert foreign currency into rupees, allowing you to repatriate your money. It's good for managing overseas earnings and offers tax-free interest. In contrast, NRO accounts let you deposit both foreign and Indian currency. However, interest is taxed. These accounts are important for NRIs because they facilitate fund transfers, manage Indian income, eliminate currency risk, and let them operate with Indian residents. Additionally, if you are new to trading and need help understanding it, you may check out the user-friendly blinkX trading app, which provides online support and direction.