There are two types of Accounts:

Non-Resident Ordinary Rupee (NRO) Account

NRO accounts help you manage Indian rupee income sources like rent, dividends, or any other income such as profits that come to you from the sale of property or investments, here in India. It could be a savings account or a fixed deposit account. Here, both non-resident and resident Indians can be joint account holders. The account also allows you to receive income from foreign currency converted to Indian rupees and in Indian rupees as well. The money lies in Indian rupees in the NRO account.

The NRO account can be debited for the purpose of local payments, transfers to other NRO accounts, or remittance of current income abroad

However, NRIs should give prominence to NRE accounts to remit income abroad because the repatriation of money in NRE accounts does not require any permission and has no limits. The NRO account has a restriction of repatriating not more than 1 million US dollars, per financial year, inclusive of taxes. You also need to submit form 15CA/CB, which is a chartered accountant’s certificate confirming the tax payments as due.

Any gift in rupees or a loan by a resident Indian to an NRI within the remittance limits prescribed can be credited to the NRO account.

There are certain drawbacks to holding NRO accounts. The interest you earn in the NRO account is subject to tax deducted at source (TDS), whereas interest earned on NRE accounts is tax-free.

You can also link your NRO account to make investments in India.

NRE Account

The NRE account is an Indian rupee-denominated account. It could be savings, Foreign Currency Non-Resident Account (FCNR) or a fixed deposit account. You can deposit your earnings from overseas or transfer funds from one NRE to another NRE account and in certain cases, from NRO to NRE account along with form 15CA/CB. The foreign currency deposited into the NRE account gets converted into Indian rupees.

An NRE account comes with many benefits. The most important benefit is the principal and interest income are fully repatriable, which means you can move it out of India, as per your will and you do not need anyone’s permission to repatriate this money. Further interest income on deposits earned in an NRE account is tax-free. You can also link your NRE account to make investments in India.

Consequences of operating local savings account by NRI

As per the Foreign Exchange Management Act (FEMA) guidelines, an NRI cannot have a local savings account in his or her name in India. You must convert all your savings (money earned abroad) into an NRE or NRO account. Continuing to use the local savings account in India can attract hefty penalties. You need to inform your bank in case traveling abroad for an indefinite period to convert a savings account to NRE or NRO account as per usage.

Opening an NRE or NRO account helps NRIs in multiple ways. For instance, you can transfer your foreign earnings to India in case you have family over here who is dependent on you. Also, income from India through any investments can be retained here.