The NRI’s guide to understanding NRE, NRO, and PIS accounts

As a Non-Resident Indian (NRI), the idea of investing in India is exciting and rewarding. But let's face it – managing cross-border finances and NRI investments in India is not always a cakewalk, especially when you don’t know which bank account is right for you.

This is why it is important to understand the difference between NRE and NRO accounts, the relevance of having a PIS account, and other finer details of making overseas investments. This article covers everything you must know before starting your investment journey in India as an NRI.

What is an NRE account?

A non-resident external (NRE) account is a bank account that allows NRIs to deposit and manage their overseas income in India. If you have earnings from a job, business, or global investment, you can seamlessly deposit funds in this account. Funds get converted and deposited in INR.

One of the standout features of an NRE account is that the interest earned is tax-free. Your investments and money grow without any tax deduction, making your account ideal for gaining maximum returns in India.

Moreover, you can send back 100% of your funds abroad anytime, as it offers full NRI repatriation. As an NRE account holder, you can also assign a mandate holder on your behalf to manage your account in India.

The NRE account is ideal for NRIs who want to invest in India while keeping their funds liquid and tax-free.

What is an NRO account?
 

A non-resident ordinary (NRO) account is designed for NRIs who want to manage income earned in India. If you earn rental income, receive dividends from Indian investments, or have any other domestic income, the NRO account is your ideal choice.

The interest earned on NRO accounts is taxable in India (30% + surcharge and cess) and may also face taxation in your country of residence. However, these accounts provide extensive flexibility and features.

For instance, an NRO account offers flexibility to remit up to $1 million annually. You can also seamlessly transfer funds from an NRE to an NRO account, subject to proper documentation and RBI norms.

The NRO account is ideal for NRIs with active financial ties to India, offering secure cross-border transactions.

What is a PIS account?
 

The portfolio investment scheme(PIS) account allows NRIs to actively trade in the Indian stock market via a registered broker or wealth manager. Holders can buy and sell shares and bonds in compliance with RBI regulations.

NRIs looking to open a PIS account must have an active NRE or NRO account and a Demat and trading account. Your PIS account is directly linked to your NRE or NRO account.

What makes the PIS account so unique is its ability to simplify portfolio management. This account helps you easily track your portfolio’s performance and withdraw profits efficiently. It also provides transparent reporting of your capital gains regularly.

Difference between NRO, NRE and PIS accounts
 

Choosing the right account for your investment goals
 

Understanding the difference between the NRO, NRE, and PIS accounts is not enough; you must know how to align these accounts with investment options such as mutual funds, real estate, and fixed deposits.

1. Mutual fund investments

As an NRI investing in mutual funds, choosing the right account is crucial to making the investment process efficient. NRIs can choose either Non-Resident Ordinary (NRO) Account or Non-Resident External (NRE) Account for investing in mutual funds as both are rupee-denominated accounts.
Note that, repatriation from NRO accounts is allowed up to $1 million in a financial year, while NRE accounts allow free and limitless repatriation.

2. Real estate

As per recent reports, it is anticipated that by 2025, the surge in NRI investment will account for about 20% of all real estate investments in India as compared to 10% in 2020. The account type you choose significantly influences your real estate investment returns, whether in residential or commercial properties.

a. NRE account – If you are purchasing real estate using your overseas income, an NRE account can be advantageous. It simplifies the transfer of funds to India and allows for unrestricted repatriation of the sale proceeds and associated gains, provided the property was initially purchased using NRE funds.

b. NRO account – In an NRO account, you can manage and use income generated in India, such as rent from a property. This account also enables you to handle property sale proceeds and associated taxes efficiently, ensuring compliance with Indian tax laws.

3. Fixed deposits

Fixed Deposits (FD) for NRIs are widely regarded as the preferred investment option that assures returns. However, choosing between an NRE or NRO account can make all the difference if you wish to optimise the investment.

a. NRE account – An NRE account allows you to use your overseas income for deposits. The principal and interest earned are tax-free in India, and the funds are fully repatriable.

b. NRO account – If your deposit is being funded by income earned in India, the NRO account is more suitable. It is important to note that the interest earned in an NRO account is taxable and may affect your overall returns.

Importance of choosing the right NRI account type
 

Selecting the right NRI account is a significant decision that impacts taxation, fund repatriation, and ease of investment. A mismatch between your financial needs and account type may lead to unnecessary complexities.

1. Taxability

When you deposit your overseas income in an NRO account, it attracts higher tax liabilities as interest accrued in NRO accounts is taxable in India.

Conversely, many make the mistake of managing domestic incomes like rent or dividends using their NRE account to avoid taxes. However, this may precipitate major compliance issues, as such income is best suited for an NRO account.

2. Repatriation of funds

Repatriation limitations also lead to inconvenient breaks in financial planning.

The NRE account permits full repatriation of both capital and interests. The NRO account only permits outward remittances up to $1 million annually. This limitation can cause liquidity challenges if significant funds need to be sent abroad.

3. Ease of investment

Without a PIS account, investment tracking and tax reporting can become very complicated for NRIs keen on trading Indian stocks. The PIS account streamlines investments, which helps you stay compliant with the RBI while managing your portfolio efficiently.

Partnering with a reliable banking provider is essential to navigate these challenges effectively. The NRI Banking Services from IDFC FIRST Bank stand out by offering tailored NRE, NRO, and PIS account solutions.

With a clear focus on simplifying tax compliance and ease in fund management, IDFC FIRST Bank empowers you to maximise the potential of NRI investments in India.

To sum up

Investing in India as an NRI presents unique opportunities to enhance your returns. Choosing the right account, be it an NRE, NRO, or PIS account, is a strategic decision, as it impacts your financial outcomes.

With NRI Banking Services from IDFC FIRST Bank, managing your account becomes effortless. These NRI banking solutions equip you with the right tools, expert support, and tailored account options to help you achieve your financial goals.

Explore NRI Banking Services from IDFC FIRST Bank and begin your investment journey today!