Difference between NRI vs NRE

There are many Indians who live abroad and have continuous monetary transactions in India. They can be interested in any kind of investment or sending money to the family living back in India. Irrespective of the purpose of the transaction, it becomes easier when one has an NRI account with a bank in India.

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Here is detailed information about NRE accounts and NRI vs. NRE comparison.

Who is an NRI?

In India, there is no definite law that particularly states the visa status of a Non-Resident Indian. But in general, people give this status to anyone who lives outside of India. Instead of having a definite classification, the NRI status is given to people who are not a Resident of India.

So, under Income Tax Act 1961, Section 6, an Indian citizen is deemed to be a Resident of India if they have stayed in India for a minimum period of 182 days during the previous fiscal year or resided for 60 days in the current year and minimum of 365 days in the previous four years. Anyone who does not fit at least two conditions from the criteria stated above is given the status of NRI for the previous fiscal year.

In short, if an Indian citizen resides abroad for a total of 183 days in a fiscal year, they are considered to be Non-Resident Indians. This article will help in clarifying the idea of NRI vs. NRE.

About NRI Account

To open an NRI account in India, the person should not fit the criteria of an Indian Citizen or, as per Income Tax Act 1961, should be outside of the country for at least 120 days in a particular year, and also reside in India for less than 365 days for the past 4 years combined.

Another way to become NRI is if one leaves the country for employment. Then immediately, they gain the NRI status.

There are three types of NRI accounts, and they all have different characteristics, which make it easy to compare NRI vs. NRE. So to open them, one should have a clear understanding of them. One can deposit the money they earn from their current residing country or the amount they earn from India. The options depend on the type of NRI account.

Three Types of NRI Account

The three NRI accounts are NRE, NRO, and FCNR. More description of them and comparison of NRI vs. NRE are given below:

NRE

NRE stands for Non-Residential External. The account accepts deposits of earnings that originate from the NRI's current country of residence. But with just one clause, and that is that the earnings should be denominated in Indian Rupees.

For example, X works in a European country and has to support their parents back in India. The deposit, says 3000 Euro, every month denominated in Indian Rupee. Based on the exchange rate, the Euro will be converted into Indian Rupees. So, if 1EUR= 90 INR, then on conversion, the account holds Rs. 2,70,000 (3000x90).

Features

Allows foreign currency transfer, and the balance is held in Indian Rupees.
The deposited amount is tax-free and repatriable.
Eligible to earn up to 4.35 per cent interest per annum on NRE deposits.

NRO

A Non-Resident Ordinary Account accepts income originated in India and is held in Indian currency. The source of income can be a dividend, rent, pension, return of equity, etc.

For example, Y is an NRI and holds investments in Indian financial instruments. Then the timely dividends and profits can be deposited in their NRO account. Since the deposits are denominated in Indian Rupees, there is no need for currency conversion.

Features

Withdrawals are possible only in Indian Currency.
NRO account handles all the earnings from Indian sources.
The repatriate limit for every financial year is 1 million USD.
If foreign currency is deposited in this account, the amount is converted into INR based on the conversion rate.
One can earn up to 5.5 per cent interest per annum on NRO deposits.

FCNR

Foreign Currency Non-Residential Account allows NRIs to deposit foreign currency and is denominated in the currencies listed by RBI. The prescribed currency denominations are CAD (Canadian dollar), USD (US dollar), EUR (Euro), AUD (Australian Dollar), HKD (Hong Kong Dollar), GBP (Great Britain Pound), SGD (Singapore Dollar), CHF (Swiss Franc), and JPY (Japanese Yen).

So, if one earns in one of these currencies, there will be no conversion, but it will be converted to one of the prescribed RBI currencies if earned in any other currency.

Features

The deposited amount and the interest earned are repatriable.
An advantage of an FCNR account is that one can hold the currency in various currencies.
The deposits have a tenure range of 1-5 years.
And on the maturity of deposits, the account automatically renews.
The deposits are non-taxable in India.

Benefits of NRI Accounts

Apart from the convenience of depositing money, NRI and NRE accounts have many other benefits.

Repatriation

One of the best things about these NRI accounts is that they allow a free flow of funds. Both NRO and NRE accounts allow the movement of money. One can repatriate the entire fund abroad, both the interest and principal. NRE accounts allow full repatriation whereas, the funds in NRO accounts are first tax deducted then, the remaining can be repatriated.

FCNR Deposit

The FCNR accounts allow one to deposit and hold the funds in foreign currency. This way, they can even earn interest in foreign currency denominations. This fund is not taxable in India.

Tax Benefits

Having proper knowledge and understanding of tax benefits helps make a decision about which account is suitable for the funds. The deposits in the NRE accounts are not taxable in India. On the other hand, Tax regulations are applicable on funds deposited in NRO accounts. One can also transfer funds from the NRO account to an NRE account after they are deducted for tax.

Convenience

Opening NRI accounts is a very simple and easy process. One can do it even without visiting the bank's Indian branch. Fill the online form and take a printout of it. Next, attach all the required documents and make sure they are self-attested. Bunch them together and courier them to the bank in India.

Minimum Balance

The minimum deposit balance in the account has been dropped significantly. Most banks that provide NRI accounts require 10,000 INR to be kept as a minimum balance.

Comparison of NRI Accounts

All three accounts have their features and differ from each other in some way. The differences of NRI vs. NRE, NRE, and NRO are:

NRE VS NRO

Purpose- the NRE account is used to deposit earnings originating from the NRI’s current residing country, whereas NRO accounts manage the earnings that originate from Indian income sources.
Joint account- For opening a joint account in NRE accounts, both need to be NRIs. On the other hand, in NRO accounts, an NRI can open a joint account with an Indian resident or another NRI.
Tax benefits- the entire fund that is principal and interest is tax exempted in NRE accounts, whereas in NRO accounts, both principal and interest are Income Tax deductible.
Repatriation- the NRE account allows one to repatriate the entire fund. On the other hand, the NRO accounts allow the interests to be fully repatriated, but the principal can be withdrawn up to the limit of 1 million USD in a fiscal year.
Conversion rate- NRE account balance gets affected by the current conversion rate, whereas the NRO balances do not.

NRE VS FCNR

Deposit denomination- the deposits in the NRE accounts are denominated in INR. In the case of the FCNR account, the deposit is denominated in the RBI prescribed currencies (SGD, EUR, AUD, HKD, JPY, CHF, GBP, USD, and CAD).
Tax benefits- NRE exempts the entire fund from any Income Tax. In FCNR accounts, only the interest is tax exempted.
Purpose- NRE accounts take the deposit of earnings from the country where the NRI is currently residing but denominated in INR. The FCNR accounts allow the deposition of earnings from the NRI's residing in the country, but they need to be denominated in one of the nine currencies prescribed by RBI.
Type of accounts- one can open fixed deposits, savings, and current accounts under NRI and NRE accounts. In an FCNR account, one can only open a fixed deposit account and has a maturity period range of 1-5 years.

NRO VS FCNR

Currency denomination- NRO maintains the balance in INR, whereas the FCNR account holds the fund in the prescribed nine currencies.
Tax benefits- NRO accounts deduct tax from both the interest and principal. On the other hand, FCNR accounts only deduct tax from the interest earned.
Purpose- NRO accounts are opened to maintain the timely collection of earnings from Indian income sources. In contrast, FCNR is used to deposit earnings from the country where the NRI is residing.
Repatriation- in NRO accounts, the principle can be withdrawn up to 1 million USD in a year, and full interest is allowed. FCNR allows full balance repatriation.
Joint account- joint account can be opened with both an NRI and Indian resident in the case of an NRO account. The case is different with FCNR accounts; it can be jointly opened only with another NRI.

Eligibility Criteria for NRI Accounts

The following people can be eligible to open NRI and NRE accounts:

Students are attaining education and degrees in foreign countries.
People employed in oil rigs, Indian Navy, overseas shipping firms, or foreign country registered airlines. These occupations should require the employee to reside outside of India at least for 182 days.
The person owning a business, practising some trade or employed abroad.
Government employees with diplomatic passports.

Documents Required

Employment proof
Visa permit, student visa, employment visa, residence visa, or work permit.
Photocopy of the information page of the passport.
Bank application form
KYC document (optional)

Bottom Line

A Non-Resident Indian can have multiple reasons to open an NRI account as NRO accounts for NRI and NRE. Before choosing between the three types of accounts available, have a complete understanding of the characteristics, pros, and cons. This part of the whole process is essential because the rest is easy. Banks have made sure that opening an NRI account is easy and hassle-free. The accounts are a great way to manage the funds in India when one resides in a different country.

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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).