NRE vs NRO: Your money may be sitting in the wrong account; what to check; residential status, source of income and more

Moved abroad but still using your old Indian savings account? Your banking arrangements may need an update. The wrong account can lead to avoidable tax deductions, transfer restrictions, and compliance problems.

Start with your residential status

Once you become a non-resident under India's foreign exchange rules, inform your bank. Your existing resident savings account should be changed to an NRO (Non-Resident Ordinary) account. Simply opening another account does not change the status of the old account.

Gaurav Matta, co-founder of NRiSimplify, says many NRIs overlook this review after moving abroad. He advises matching each income source with the appropriate account and reviewing changes regularly.

“Many NRIs continue using the wrong bank account simply because they have not reassessed their banking arrangements after becoming non-resident. The basic distinction is straightforward: Non-Resident External Accounts are meant for overseas earnings or inward remittances from abroad, while NRO accounts are meant for income arising in India, such as rent, pension or property proceeds,” said Matta.

“Continuing to use a resident savings account after becoming an NRI can also create compliance issues. NRIs should map every source of income to the appropriate account and review their accounts whenever their residency or income profile changes,” he added.

Check where your money comes from

An NRE account mainly helps you bring overseas earnings into India. An NRO account commonly handles Indian income, including rent, pensions and property sale proceeds. Both accounts hold money in Indian rupees.

For example, your overseas salary can go into NRE while Indian rent commonly enters NRO. However, NRO accounts can also receive money from abroad. Eligible Indian income can be remitted to NRE after the bank verifies it and applicable taxes are addressed. Ask your bank before assuming that every Indian receipt must be entered in NRO.

Check the tax on interest

NRE interest is exempt from Indian income tax while you meet the eligibility conditions. NRO interest is taxable, and banks deduct tax before paying you. The usual deduction is 30%, plus applicable surcharge and cess. Without surcharge, this works out to 31.2%.

This deduction may differ from your final tax liability. A tax agreement between India and your country could allow a lower rate. Ask which residency certificates and other documents your bank needs. India's exemption does not automatically mean exemption in your country of residence.

Check how easily money can move abroad

You can freely transfer NRE deposits and interest abroad. NRO balances generally qualify for transfers up to USD 1 million each financial year. Conditions, applicable taxes and documents apply.

Current income, such as rent or a pension, can be remitted separately after applicable taxes have been withheld. The million-dollar limit, therefore, does not cover every NRO transfer.

Check joint holders and future needs

NRE accounts can include a resident relative under the permitted former-or-survivor arrangement. NRO accounts can also have a resident joint holder. Ask the bank who can operate the account during your lifetime.

Finally, review incoming payments, interest deductions, nominees, and overseas transfer needs with your bank. Keeping both accounts may help when you earn money in India and abroad.