It is quite common for people from India to go and settle abroad. Indian citizens who do so for employment or carrying out a business or vacation there or for any other purpose due to which their period of stay outside India is uncertain, would be considered Non-Resident Indians (NRIs).
Nonetheless, many such NRIs prefer to retain the bank accounts they had held in India. This could be for easy repatriation of income made abroad to the home country. Or they might want to keep income earned in India in India itself. In such cases, one can either open a Non-Resident account or a Non Resident Ordinary rupee (NRO) account. Let's understand these two accounts and their characteristics a little more in detail.
First and foremost, one needs to understand that once an individual moves out of India, he is not allowed to hold a resident savings account. It would be considered as a violation of the Foreign Exchange Management Act or FEMA regulations. Hence, it is essential for an NRI to immediately re-designate his/her savings account as either an NRE or an NRO account by providing due intimation to the bank in this regard.
An NRE account is an Indian Rupee denominated account. Funds from abroad, say, income earned abroad can be periodically deposited easily into an NRE account in foreign currency. This gets converted to INR the moment the money is deposited to the account at prevailing exchange rates.
Further, you can also freely repatriate the funds in this account along with the interest without any hassles outside India. No limit has been prescribed to restrict the amount that can be repatriated from an NRE account. Moreover, the income earned from an NRE account is exempt from income tax.
Please note that an NRI can hold an NRE account jointly with another NRI only.
An NRO account, on the other hand, is best suited to park the income that you receive in India viz interest, dividend, rental income etc. However, repatriation of funds from an NRO account comes with certain restrictions. The maximum one can repatriate overseas from an NRO account during a year is USD 1 million. Such repatriation would be done after deduction of applicable taxes if any.
The interest from an NRO account is taxable and must be declared as income by an NRI when filing his income tax return.
Further, as an NRI, you can open an NRO account jointly either with another NRI or with a resident of India (probably a close relative of yours).
Rules for Deposit and Withdrawal of funds
While funds earned abroad can be repatriated into India and can be deposited either in an NRE or an NRO account, it is important to note that income earned in India can be deposited only in an NRO account.
As regards withdrawals, it can be done from both the accounts only in INR. In case of an NRO account, if the deposit as well as the withdrawal is made in INR, there is no exchange rate risk involved; whereas, in case of an NRE account, exchange rate risks on account of currency fluctuations cannot be ruled out.