NRE vs NRO vs FCNR: The Ultimate Account Guide for Tax-Smart Money Management
Comprehensive comparison of interest taxation (NRE: tax-free, NRO: 30%), repatriation limits, when to use which account, optimal fund transfer strategies, and common mistakes like keeping rental income in NRE accounts
Written by
CA Ashama Rajawat
The Three NRI Accounts: Overview
As an NRI, you need specialized bank accounts to manage your finances in India. Understanding which account to use for what purpose can save you lakhs in taxes and prevent compliance issues.
NRE Account
Non-Resident External
For: Foreign income brought to India
NRO Account
Non-Resident Ordinary
For: Indian income (rent, dividends, pensions)
FCNR Account
Foreign Currency Non-Resident
For: Foreign currency fixed deposits
Detailed Comparison Table
| Feature | NRE | NRO | FCNR |
|---|---|---|---|
| Interest Taxation | Tax-Free | 30% TDS + Cess | Tax-Free |
| Currency | INR | INR | Foreign (USD, GBP, EUR, etc.) |
| Full Repatriation | Yes (Principal + Interest) | Limited (USD 1M/yr) | Yes (Principal + Interest) |
| Source of Funds | Foreign income only | Any income (Indian or Foreign) | Foreign income only |
| Joint Account | Only with another NRI | With NRI or Resident Indian | Only with another NRI |
| Account Types | Savings, Current, FD | Savings, Current, FD | Only Fixed Deposit |
| Interest Rate | 3-4% (Savings) 5-7% (FD) | 3-4% (Savings) 5-7% (FD) | Varies by currency Usually lower than NRE |
| Forex Risk | Yes (INR fluctuation) | Yes (INR fluctuation) | No (Foreign currency) |
NRE Account: Deep Dive
Best For: Parking Foreign Salary/Income
Advantages:
- • Zero Tax: Interest earned is completely tax-free
- • Free Repatriation: Transfer any amount back abroad anytime
- • Higher Interest: FD rates up to 7-8% (vs 1-2% abroad)
- • Rupee Exposure: Benefit if INR appreciates
Disadvantages:
- • Forex Risk: Loss if INR depreciates when repatriating
- • Limited Use: Cannot deposit Indian income (rent, pension)
- • Joint Account Restrictions: Cannot add resident Indian
✓ Correct Use of NRE Account
- • Transfer foreign salary to NRE account
- • Keep emergency funds in India
- • Park savings in NRE FD for tax-free returns
- • Receive foreign gifts/inheritance
- • Accumulate funds for future property purchase
✗ Wrong Use (Illegal)
- • Depositing rental income from India property
- • Receiving pension from Indian employer
- • Getting dividend from Indian stocks
- • Property sale proceeds (should go to NRO first)
NRO Account: Deep Dive
Best For: Managing Indian Income
Advantages:
- • Accepts All Income: Rent, pension, dividends, sale proceeds
- • Joint with Resident: Can add parents/spouse living in India
- • Local Transactions: Easy bill payments, transfers to residents
- • Mandatory for Certain Income: Only legal option for Indian earnings
Disadvantages:
- • 30% TDS on Interest: Heavily taxed (NRE is tax-free)
- • Limited Repatriation: USD 1 million per FY after tax compliance
- • Complex Repatriation: Needs CA certificate (Form 15CA/15CB)
✓ Correct Use of NRO Account
- • Receive monthly rental income
- • Credit pension from Indian company
- • Deposit dividend from Indian investments
- • Receive property sale proceeds
- • Pay bills, taxes, maintenance for India property
- • Transfer to parents/family in India
Repatriation from NRO Account
Current Income (Rent, Pension, Dividend, Interest):
- • Up to USD 1 million per financial year
- • After paying applicable taxes
- • Need Form 15CA/15CB for remittance
Sale Proceeds of Assets:
- • Up to USD 1 million per FY (for immovable property)
- • Must prove source of original purchase (INWARD remittance)
- • Need CA certificate and Form 15CA
FCNR Account: Deep Dive
Best For: Currency Hedging & Fixed Deposits
Advantages:
- • No Forex Risk: Deposit and withdraw in same foreign currency
- • Tax-Free Interest: Like NRE, no tax on interest earned
- • Full Repatriation: No limits on transfer abroad
- • Currency Options: USD, GBP, EUR, AUD, CAD, JPY
Disadvantages:
- • Only FD: No savings or current account option
- • Lower Interest: 1-3% typically (vs 6-7% in NRE)
- • Lock-in Period: Minimum 1 year, maximum 5 years
- • No Rupee Upside: Miss out if INR appreciates
When to Choose FCNR Over NRE
- 1. Weak Rupee Outlook: If you expect INR to depreciate, FCNR protects your value
- 2. Short-Term India Assignment: If returning abroad in 2-3 years, avoid conversion costs
- 3. Defined Future Need: If you need foreign currency at specific future date (kids' education abroad)
- 4. Strong Home Currency: If your home currency is appreciating vs INR
Optimal Money Management Strategies
Strategy 1: Dual Account System
Setup:
- • NRE Account: For foreign salary, savings, and investments
- • NRO Account: For rental income, pension, local expenses
Monthly Flow:
- 1. Foreign salary → NRE account
- 2. Keep emergency funds + investments in NRE FD (tax-free interest)
- 3. Indian rental income → NRO account
- 4. Pay India expenses from NRO
- 5. If NRO accumulates excess, repatriate annually (up to $1M)
Strategy 2: Interest Rate Arbitrage
Take advantage of higher Indian FD rates (6-7%) vs foreign rates (1-2%) while getting tax-free interest.
Example:
- • Transfer USD 50,000 from USA to India
- • Open NRE FD @ 7% = ₹2,91,250 interest/year (assuming ₹83/USD)
- • Tax-free! In USA, same USD 50K @ 2% = $1,000 (taxable)
- • Net benefit: ₹2,08,000/year (~$2,500) risk: INR depreciation
Strategy 3: Property Purchase Planning
To Buy Property in India:
- 1. Transfer funds to NRE account (keep INWARD remittance certificate!)
- 2. Make payment from NRE account directly to builder/seller
- 3. This creates clean audit trail for future repatriation
- 4. When selling, can repatriate up to purchase amount from NRO
Critical:
Never buy property from NRO account if you plan to repatriate sale proceeds later. Always route through NRE for repatriation eligibility.
Common Mistakes and How to Avoid
- ✗
Depositing Rental Income in NRE Account
Violation: NRE cannot accept Indian income. Use NRO for rent.
Fix: Immediately inform bank, reverse transaction, may face penalties
- ✗
Not Claiming TDS Refund on NRO Interest
Bank deducts 30% TDS on NRO interest, but your actual tax may be lower (or nil if RNOR status).
Fix: File ITR in India and claim refund of excess TDS
- ✗
Continuing Resident Account After Becoming NRI
Once you become NRI, resident savings account becomes non-compliant. Banks can freeze it.
Fix: Immediately convert to NRE/NRO within reasonable time of becoming NRI
- ✗
Losing INWARD Remittance Certificates
Without this proof, you cannot repatriate property sale proceeds or prove foreign source of funds.
Fix: Request duplicate from bank (may take time), keep digital copies forever
- ✗
Not Updating Status When Returning to India
If you move back permanently, NRE/FCNR accounts must be converted to resident accounts.
Fix: Inform bank within reasonable time, convert accounts, else face scrutiny
Conclusion
Choosing the right NRI account—NRE for foreign income with tax-free returns, NRO for Indian income management, or FCNR for currency hedging—is crucial for tax optimization and compliance. The dual account strategy (NRE + NRO) works best for most NRIs, maximizing tax benefits while maintaining liquidity. Always maintain proper documentation, especially INWARD remittance certificates, and ensure you're using accounts correctly to avoid penalties and repatriation issues.