A Non-Resident Indian (NRI) may open an NRE (Non-Resident External) deposit or NRO (Non-Resident Ordinary) deposit with any of the Authorised Dealer Banks (AD Banks) in India. While both these categories of fixed deposits are denominated in Indian currency, they differ in various features. Here is a brief comparison between these two categories:
- Source of Funding – The account holder can fund an NRE deposit only through the foreign currency funds available at the time of return to India or through an NRE bank account. Like an NRE bank account, NRE FDs cannot be opened by the account holder through rupee credits. In contrast, the NRO FD can be funded through remittance in foreign currency from abroad or any rupee bank account or by converting a regular resident deposit account at the time of change of residential status.
- Repatriation of Funds – As per the extant regulations issued by the Reserve Bank of India (RBI), the NRE deposits can be repatriated outside India, including principal and interest, without any limit. On the other hand, NRO deposits are subject to repatriation limits. While the interest earned on such deposits is freely repatriable, repatriation of the principal amount is subject to the specified limits.
- Transfer of Closure Proceeds – The closure proceeds of NRE deposits can be transferred into an NRE account as well as an NRO account. However, any such transfer into NRO bank accounts may result in loss of repatriation benefits for such an amount since the balance in NRO accounts is subject to repatriation restrictions. As such, it is always advisable to transfer the proceeds of NRE deposits to NRE accounts itself to retain the repatriation character of such funds. On the other hand, NRO deposits can be transferred only to an NRO account and cannot be transferred to an NRE account.
- Interest on Premature Withdrawal – NRE FDs can be made for a minimum period of 1 year. If such deposits are required to be prematurely withdrawn within one year, the bank will pay no interest. For NRO deposit accounts, such a minimum investment period for payment of interest to the deposit holder ranges from 7 days to 30 days. For a more extended investment period in NRE and NRO deposits, the interest is generally paid as per the applicable rate for the actual investment duration or the actual contracted rate, whichever is less.
- Pledge for Foreign Currency Loans outside India – While both NRE and NRO deposits can be pledged for rupee loans within India, NRO deposits cannot be pledged for availing of foreign currency loans outside India. There is no restriction on pledging NRE deposits for this purpose.
- Joint Account – One can open an NRE deposit in the joint name with another NRI only and not with any resident Indian, while an NRO deposit can be jointly held with an NRI or a resident.
- Taxation – As per the prevailing tax laws, the interest on NRE deposits is exempt from tax in India. However, no such tax benefit is available on NRO deposits. As such, the interest earned on NRO deposits is taxable in the hands of the NRI depositor. Considering the taxability of interest income for NRO deposits, such interest is also subject to Tax Deduction at Source (TDS).
With the above points of difference between these two deposit accounts, one would be able to make an informed choice about choosing the specified category of deposits, which may also depend upon the funding of such deposit, repatriation benefits, etc.
Disclaimer – The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules, as tax benefits are subject to changes due to change in tax laws.