NRE vs NRO vs FCNR Accounts: Which is Better?

Posted by Samantha Kennedy on October 6th, 2021

Which is the right kind of NRI account? This is a dilemma faced by most Indians residing overseas who wish to carry out financial transactions in their homeland. As per the Foreign Exchange Management Act (FEMA), an NRI is eligible to hold and maintain an NRE/NRO and FCNR account in any authorized bank in India. NRIs can use the designated banks for anything ranging from investment, saving, and managing income from local sources to transferring money earned overseas.

Let’s take a quick look at the three banking options along with their key features to help understand what purpose they can serve.

Non-Resident External (NRE) Account:

NRE is a rupee-dominated account that is used primarily to transfer foreign earnings to India. It can be maintained as a saving, current, fixed deposit, and recurring deposit account. On depositing the money in a foreign denomination, it\'s converted into INR.

Withdrawal of funds is only in rupees; hence, the NRE account is subject to exchange rate fluctuations. This type of account allows free repatriation of money (principal & interest) back to the country of residence.

Also, no income, wealth, or gift tax is applicable in India. And yes, an NRI can jointly hold an NRE account with another NRI but not a resident Indian.

Non-Resident Ordinary (NRO) Account:

The NRO account is also held in INR and available as savings, current, recurring, or fixed deposit. It is ideal for managing income generated from local sources (rent, salaries, dividends, pension, etc.) Repatriation of funds comes with certain limitations. It cannot exceed USD 1 million per financial year.

Also, the interest accrued from an NRO account is taxable in India. This type of account can be jointly held with an Indian resident as well as another NRI.

Foreign Currency Non-Resident (FCNR) Account:

The FCNR is a foreign currency-denominated account. NRIs can deposit funds in any of the nine permitted currencies (USD, GBP, AUD, SGD, CAD, CHF, HKD, EUR, JPY) of their choice. It is a term deposit with a tenure ranging between 1 to 5 years.

Most of the reputed banks offer the best FCNR deposit rates of interest in the designated foreign currency. Funds in the account are fully repatriable, and the interest earned is exempt from taxation in India.

Given that both the deposits and withdrawals are made in foreign currency, the risk of losses due to exchange rate fluctuations is slim. Last but not least, nomination and loan facilities are available.

NRE vs NRO vs FCNR Accounts: Which is the best one?

All three accounts offer NRIs easy ways of managing their income from diverse sources.  The choice depends on specific needs. The NRE account is exempt from taxation, enables foreign currency transfer, and offers full repatriation of funds. An NRO account is perfect for managing earnings in India. The FCNR account is a great option to retain earnings in foreign currency, enjoy good returns via attractive interest rates, tax benefits, and full repatriation flexibility.

So, what\'s the verdict? We hope the comparative analysis will help you make an informed choice.