The Indian government doesn’t allow NRIs to hold bank accounts in their names in India under the Foreign Exchange Management Act (FEMA). Thus, NRIs have to choose between two types of accounts: Non-resident external (NRE) and Non-resident ordinary (NRO) accounts.
What’s an NRE account?
An NRE (Non-Resident External) account is a savings account that an NRI maintains in India. In this account the NRI invest his/her foreign income earned outside India.
What’s an NRO account?
An NRO (Non-Resident Ordinary) account is a savings account where an NRI can maintain and manage his/her income earned in India such as rent, dividends, pension etc.
Taxation of NRE and NRO accounts:
NRE accounts are completely exempt from tax. Neither the balance, nor the interest earned on these accounts is taxable.
The interest earned on an NRO account, however, is taxable at 30% according to the Income Tax Act 1961.