NRE vs NRO Accounts: Taxation, TDS, and Repatriation Rules Explained

Ask most NRIs why they have both an NRE and an NRO account and the honest answer is usually that a bank relationship manager told them to open both, without explaining why it mattered. That gap tends to surface at the worst possible moment: a fixed deposit matures and nearly a third of the interest has already disappeared into TDS, or a repatriation request stalls because the wrong kind of money landed in the wrong account. NRE and NRO accounts look almost identical on a bank's website. Both hold rupees, both offer savings and fixed deposit options, both come with a debit card and a chequebook. Underneath that, tax law treats the money sitting in them in completely different ways. Working out which account a given rupee belongs in, before it's deposited, is worth far more than learning the difference after a TDS certificate or a stuck remittance forces the question.

What NRE and NRO Accounts Are Actually Built For

An NRE (Non-Resident External) account exists for money you earned outside India and are choosing to bring in: foreign salary, consulting income, savings built up over years abroad, or proceeds you want to hold in rupees while keeping them fully mobile. You can only fund it with foreign currency remittances or transfers from another NRE or FCNR account, and the bank converts and holds the balance in Indian rupees. An NRO (Non-Resident Ordinary) account exists for the opposite case: money that arises inside India, such as rent from a flat you still own here, dividends on Indian shares, a pension from a former Indian employer, or interest on investments you held before you became an NRI. There's a mandatory side to this too. The moment your residential status changes to NRI, any regular resident savings account you already hold is supposed to be redesignated as an NRO account, or closed, rather than left running as an ordinary resident account. Most NRIs end up holding both accounts at the same time, simply because very few people earn only foreign income or only Indian income throughout their years abroad.

Why NRE Interest Stays Tax-Free and NRO Interest Doesn't

The exemption on NRE interest comes from Section 10(4) of the Income Tax Act, and it isn't a permanent feature of the account itself, it's tied to your residential status. For as long as you remain an NRI, or qualify as RNOR, interest credited to your NRE savings or fixed deposit stays completely outside India's tax net, with no ceiling on the amount. The day your status shifts to Resident and Ordinarily Resident, typically once you've moved back to India and stayed long enough, that same account's interest becomes taxable going forward, so the exemption is conditional rather than something to rely on indefinitely after you've returned for good. NRO interest never gets that treatment in the first place. It's taxed exactly like a resident's interest income would be, added to total income and taxed at slab rates, except the bank doesn't wait for you to compute that at filing time. Under Section 195, the bank deducts tax at source on the full interest amount as it's credited, generally at a flat rate around 30% plus surcharge and cess, since there's no equivalent of the basic exemption threshold that shields a small resident depositor's interest from any TDS at all. For many NRIs, especially those whose total Indian income sits well below what a 30%-plus rate would suggest, that upfront deduction is considerably more than what they actually owe once a return is filed.

Bringing Down the TDS on NRO Interest

Two routes exist to fix that overpayment at source instead of chasing a refund afterward. If your country of residence has a tax treaty with India, submitting a Tax Residency Certificate and Form 10F to the bank can bring the TDS rate down to whatever the treaty specifies for interest income, often well below the domestic default. Separately, an NRI expecting a lower real tax liability can apply to the Assessing Officer for a lower or nil deduction certificate, so the bank deducts only the certified rate instead of the flat default. Skip both, and the excess simply sits with the government until an Indian tax return is filed and a refund is processed, which routinely takes months to come through.

Repatriation: Unlimited vs Capped

This is where the two accounts diverge just as sharply as they do on taxation. Money in an NRE account, both what you deposited and any interest it earned, can be sent abroad at any time, in any amount, with no approval process beyond the bank's usual remittance paperwork. NRO funds work under a different regime entirely. The Reserve Bank permits repatriation of NRO balances up to USD 1 million in a financial year, covering current income as well as specified capital account transactions like the sale proceeds of property or investments, but only after applicable tax has been paid or accounted for. Getting that money out requires Form 15CA, a self-declaration filed on the income tax portal, and in most cases Form 15CB, a certificate from a chartered accountant confirming the tax position on the remittance. Moving money from an NRO account into an NRE account, rather than sending it abroad directly, falls under this same USD 1 million annual ceiling and the same documentation. It isn't a way around the limit, just a different destination for it.

A Practical Guide to Which Account Fits Which Purpose

• Foreign salary, consulting fees, or savings you're remitting from abroad and want to keep fully liquid and repatriable: use an NRE account.
• Rent, dividends, or any other income arising from assets you own in India: use an NRO account, since India-sourced income cannot legally be credited to an NRE account.
• Pension from a former Indian employer, or interest on investments you held before becoming an NRI: use an NRO account.
• Sale proceeds from Indian property or other Indian assets: route these through an NRO account, keeping the USD 1 million annual repatriation ceiling and Form 15CA/15CB in mind before deciding how much to move abroad and when.
• An existing resident savings account, the moment your status changes to NRI: redesignate it to NRO rather than continuing to operate it as an ordinary resident account.
• Money you already hold in foreign currency and want to shield from conversion risk: consider an FCNR deposit instead of NRE, since it holds the balance directly in foreign currency with the same tax-exempt interest treatment.

None of this needs to be decided once and never revisited. As your income sources change, a pension starts, a property gets sold, a new assignment abroad begins, the right account for that particular rupee can change too. Keep the two clearly separated rather than defaulting everything into whichever account is easiest to access, and keep your Foreign Inward Remittance Certificates and CA certificates on file. They're exactly what a bank or the tax department will ask for the next time you want to move money across the border.