Non-resident external (NRE) and non-resident ordinary (NRO) accounts are accounts NRIs have to open once they become NRIs.
The twin purposes served by this are:
1. An NRI can send money back to his/her home in his/her native country; this is also called repatriation
2. He/she can keep his/her India-based earnings in India itself.
Though they are seemingly similar, NREs and NROs are different from one another. Here are the aspects that make them different:
- Ways of depositing money:
An NRI can only deposit foreign currency in to an NRE account while he/she can deposit Indian rupees in NRO account.
- Taxable income:
Money deposited in an NRE account is tax free while the same is taxable in an NRO account. Thus, if you are maintaining any NRI-fixed deposit in your NRE account, then both interest and principle are tax free while in case of NRO account, the interest would be taxed.
- Source of money:
If you are generating money from rent or dividends in India, then you need to have an NRO account because Indian rupee-denominated currency cannot be deposited into NRE account.
- Transfer limit:
Non-resident ordinary (NRO) accounts impose a limit on the amount of money that can be transferred from India to abroad. So, if you want to send money abroad from India, NRE account can be better choice than NRO account.