New Businesses and start-ups often find it difficult to get finance and growth capital. This is mainly because of the risk involved in lending money to these businesses. In most cases, banks, NBFCs, and other financial institutions are unwilling to lend money unless the business owner puts in their personal assets as collateral or guarantees. This is where a non-recourse asset (NRA) account comes in handy for financing new businesses. If you are thinking about starting up a business or are already running one, you must know the difference between NRE and NRO accounts.
Did you know?
NRE/NRO accounts can be used to purchase immovable assets in India.
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What Is NRE Account?
A Non-Resident External Account (NRE) is an account that is maintained by an Indian citizen who is an NRI (Non-Resident Indian). It is basically an account opened by an NRI working outside India for transferability in the future. This account can be maintained in any currency and is usually denominated in Indian Rupee. An NRE account can be opened in any Indian bank branch in your present country or in India. It is a savings account that pays interest.
Since an NRE account is denominated in the Indian Rupee, it is subject to the same fluctuations in value as the rupee. You cannot transfer funds from an NRE account to a Resident Indian account or vice versa. According to Indian tax law, you are supposed to pay taxes on any funds repatriated to India if they were originally deposited in an NRE account.
What Is an NRO Account?
A Non-Resident Ordinary Account is NRO's full form. It is an account opened by NRIs (Non-Resident Indians) or PIOs (Persons of Indian Origin) in India. An NRO account can be maintained in any Indian bank branch. This type of account is basically a savings account that pays interest, but interest earned on NRO deposits is fully tax-exempt if the funds are repatriated to India. In other words, you do not have to pay taxes on the interest earned on your NRO Account.
Like an NRE Account, you cannot transfer funds from an NRO account to a Resident Indian account or vice versa. But you can use funds from an NRO account to acquire immovable properties in India. This is because, according to Indian tax law, you have to pay taxes on any funds transferred to India if they were originally deposited in an NRO account.
How to Set Up NRE and NRO Accounts?
An NRE account can be set up by visiting any Indian bank branch. However, before setting up the account, make sure you have the following documents with you:
- A valid address proof (a copy of your passport or driving license or voter ID card or a utility bill or a letter from your employer).
- A valid proof of identity (a copy of your passport or driving license)
- Your latest income tax return
- Your latest bank statement
Once you have all the above documents, visit the bank and apply for an NRE account. If accepted, the bank will issue you an NRE account opening form. You will have to fill out the form and submit it along with the documents mentioned above.
You can also try opening an NRE, or NRO savings account online, provided your desired bank offers the service. Simply visit their website and click the ‘Apply Now’ button to initiate the process.
Taxation of NRIs and NRO Accounts
As mentioned earlier, interest earned on an NRE account is fully taxable in the home country. On the other hand, interest earned on an NRO account is fully tax-exempt if repatriated to India. An NRE account can be used for investment in any business in India. Hence, the entire amount deposited in the account will be taxed as Business Income in India. On the other hand, an NRO account can be used for investment in any business in India. Hence, the entire amount deposited in the account will be taxed as Business Income in India. However, the interest earned on the NRO account will be fully tax-exempt if repatriated to India.
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Differences between an NRE and an NRO Account
Both NRE and NRO accounts can be either savings or current accounts. In addition, you must maintain an average monthly balance of ₹ 75,000 for both accounts. Given below are some differences between NRE and NRO Accounts:
- An NRO account is a bank account opened in India in the name of an NRI to manage the money he earns there. NRE account is a bank account opened in India in the name of an NRI to park his overseas profits. These earnings include rent, dividends, pensions, interest, etc.
- An NRI and one or more other NRIs or Indian citizens may open a combined NRO account. A combined NRE account, however, can only be opened with another NRI.
- Any of the accounts can accept deposits of income made from sources outside of India. However, only the NRO account can receive deposits of income made in India. There is no other currency accepted for withdrawals from either account.
- Taxes are not due on NRE accounts. On these accounts, neither the balance nor the interest is subject to taxation. However, the Income Tax Act of 1961 states that the interest received on an NRO account is subject to a 30% tax.
- There is no exchange rate risk associated with an NRO account if the deposit and withdrawal are both made in Indian rupees, although there is a risk associated with NRE based on currency fluctuations.
Advantages of Opening an NRE/NRO Account
Some of the advantages of opening an NRE/NRO account are given below:
Advantages of an NRE Account
Advantages of an NRO Account
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An NRE account can be opened by an Indian citizen anywhere in the world. An NRO account can be opened only by an Indian citizen in India. An NRE account can be freely repatriated to India. An NRO account can be freely repatriated to India. An NRE account can be used for investment in any business in India. An NRO account can be used for investment in any business in India. Taxation on interest earned on an NRE account is fully taxable in the home country. Taxation on interest earned on an NRO account is fully tax-exempt if repatriated to India.
An NRE account can be used for investment in any business in India. An NRO account can be used for investment in any business in India. Transferring funds from an NRE account to a Resident Indian account is not allowed. However, funds can be transferred from an NRE account to an NRO account.
We hope now you have a better understanding of the NRE vs NRO account, NRE and NRO account meaning, and everything else explained above.
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