NRE, or Non Resident External accounts and NRO, or Non Resident Ordinary accounts are meant for NRIs (Non Resident Indians). These accounts offer a host of benefits such as repatriation, tax benefits, currency flexibility, etc. that make them the preferred choice for NRIs. Though both these accounts are available only for NRIs and offer similar functionality, they have stark differences as explained below.NRE fixed deposits
The NRE accounts are primarily targeted at NRIs whose income comes from outside India and who are interested in conveniently transferring their foreign earnings to Indian accounts. The account converts foreign currency to Indian Rupees (INR) and allows an NRI to hold and maintain their foreign currency income in INR. Also, the funds can be repatriated any time with no issues. The principal and interests earned from NRE fixed deposits are completely tax free.NRO fixed deposits
An NRO account is meant for NRIs to manage their income in India such as dividends, rents, or pension from other countries. The funds are held in INR and provide a convenient way for NRIs to consolidate earnings in India. All foreign currencies deposited in an NRO account are converted to INR. These accounts offer a limited amount of repatriation in a year, which is capped at $1 million currently.Difference between NRO and NRE fixed deposits
There are a few major differences between opening NRO and NRE FDs. These can be explained as:Taxation
NRO fixed deposits attract taxes as per Indian laws. The interests earned from an NRO FD are taxed according to the Income Tax Act, 1961 at around 30%, which is quite high when compared to domestic FD tax rates.
NRE fixed deposits do not attract taxes on the principal or interests earned from the deposits. Consequently, NRE fixed deposits are completely tax free. This difference makes an NRE FD a better option than its NRO avatar.Repatriation
NRO FDs do not offer repatriation option on the principal investment. Only the interest earned from your NRO FD can be transferred to a foreign account.
NRE fixed deposits offer the option for full repatriation of funds including both principal and accrued interests to a foreign account. These accounts therefore simplify the process of transferring principal and earned interests from an Indian account to a great deal.Joint accounts
Any two NRIs can opt for either a NRO or an NRE joint account without any complications. However, an NRI can only open an NRO account jointly with an Indian resident citizen.
NRE fixed deposits cannot be opened jointly with a resident Indian citizen, even if that person is a direct family member.Deposit and withdrawal
Only funds originating in India can be used to open an NRO account, and consequently an NRO fixed deposit. You cannot transfer funds from abroad to start a fixed deposit from your NRO. However, funds from an NRE account can be transferred into an NRO account for the purpose of opening a fixed deposit.
NRE accounts are opened by remitting foreign currency earned from abroad directly into the fixed deposit account. NRE fixed deposits are restricted from being opened by transferring currency from an NRO account or a resident savings account.
Withdrawals from both these accounts can be done only in Indian Rupees.Interest rates
The rate of interest in NRO and NRE accounts may vary according to the bank you are applying in. As such, it is imperative that you check the available rates to find the option with the highest returns for you. Typically, an NRE or NRO FD is offered with maturity between 1-20 years.
Overall, the choice between an NRE and an NRO fixed deposit boils down to your preferences according to the benefits that you can avail out of the two types of accounts. A point to remember here is that NRE accounts are used to park foreign earnings in Indian accounts and in INR, while an NRO account is used to park funds earned from India.