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Know the differences between NRO and NRE Demat accounts and their significance for NRI investors.
Investing in Indian financial markets requires careful management of accounts, especially for Non-Resident Indians (NRIs). Among the key accounts that NRIs may use for investment purposes are NRO (Non-Resident Ordinary) and NRE (Non-Resident External) Demat accounts. These accounts play a crucial role in enabling NRIs to hold and trade securities in India, while adhering to regulatory and tax frameworks. Explore the significance of NRO and NRE Demat accounts, their features, differences, benefits, limitations, and practical considerations for NRIs.
An NRE account is a bank account opened by NRIs to park income earned outside India. The account is denominated in Indian Rupees (INR) but is fully repatriable, meaning the principal and interest can be transferred abroad freely. It allows NRIs to transfer foreign earnings to India and invest in Indian securities through an NRE Demat account.
An NRO account is designed to manage income earned in India by NRIs. This could include rent, dividends, pensions, or other sources of income within the country. While the account is also maintained in INR, repatriation is limited to a maximum of USD 1 million per financial year, subject to documentation and RBI approvals.
The below given table highlights the differences between an NRE account and an NRO account:
Feature |
NRE Account |
NRO Account |
|---|---|---|
Source of Funds |
Foreign income |
Indian income |
Repatriability |
Fully repatriable |
Limited repatriability (up to USD 1 million/year) |
Tax on Interest |
Tax-free in India |
Interest is taxable in India |
Currency |
INR (converted from foreign currency) |
INR |
Joint Holding |
Only with NRIs |
Can be held jointly with residents |
A Demat (Dematerialised) account holds securities like shares, bonds, and mutual funds electronically. It eliminates the need for physical certificates, making trading faster and safer. All listed securities are held in electronic form in a Demat account.
NRIs must open separate Demat accounts linked to their respective NRE or NRO bank accounts to comply with Indian regulations. These accounts ensure segregation of repatriable and non-repatriable investments and facilitate smooth compliance with the Foreign Exchange Management Act (FEMA) and tax rules.
Linked exclusively to an NRE bank account.
Funds are fully repatriable.
Used primarily for investments funded by foreign income.
Facilitates trading and holding of Indian securities.
Tax benefits on interest earned in the linked bank account.
Full repatriability of funds makes it ideal for NRIs wanting to transfer funds abroad without restrictions.
Interest earned on NRE accounts is exempt from Indian income tax.
Helps maintain a clear distinction between foreign earnings and income generated in India.
Simplifies compliance with regulatory and tax norms.
Only investments funded through foreign income can be credited to this account.
Not suitable for income earned within India (rent, dividends).
Opening and maintaining the account involves documentation and KYC norms specific to NRIs.
Linked to the NRO bank account.
Used to manage income earned within India.
Subject to limited repatriation norms (up to USD 1 million per year).
Facilitates investment and trading of securities sourced from Indian income.
Allows pooling of income from Indian sources and investment within India.
Suitable for NRIs receiving rental income, dividends, or pension in India.
Enables holding shares, mutual funds, and bonds bought from Indian income.
Interest income is subject to tax deduction at source (TDS) in India.
Repatriation is restricted and requires RBI approvals.
Complex tax filings may be needed due to income sourced in India.
Currency risk if funds need conversion before repatriation.
Choosing between an NRE and NRO Demat account largely depends on the source of funds and repatriation needs:
If the investments are funded by foreign income and repatriation of funds is a priority, an NRE Demat account is the preferred option.
If the income is earned within India, such as rent or dividends, or if funds need to be pooled locally, an NRO Demat account is more suitable.
Many NRIs maintain both accounts to separately manage foreign and Indian income streams.
Follow the outlined steps to open your demat account:
1. Choose a SEBI-registered Depository Participant (DP).
2. Submit completed application forms for NRE or NRO Demat accounts.
3. Provide necessary KYC documents including passport, overseas address proof, Indian address proof (if any), PAN card, and photographs.
4. Link the Demat account to the corresponding NRE or NRO bank account.
5. Complete in-person verification (IPV) as required.
Monitor account statements regularly.
Use the Demat account to buy/sell shares listed on Indian exchanges.
Maintain compliance with SEBI and RBI regulations on NRI investments.
Interest on the linked NRE bank account is exempt from tax.
Capital gains from investments are subject to Indian tax laws but repatriable without restrictions.
Dividends are taxable in India but subject to withholding tax rates.
Interest earned is taxable at applicable rates in India.
Capital gains and dividends are subject to tax with TDS deductions.
Repatriation of funds may involve tax compliance and documentation.
NRE and NRO Demat accounts are essential financial tools for NRIs investing in India. Understanding their differences, benefits, and limitations enables NRIs to manage their investments efficiently while staying compliant with regulatory and tax norms. Whether it's repatriating foreign income or managing Indian-sourced funds, these accounts provide structured ways to participate in India’s stock markets.
This content is for educational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Securities and Exchange Board of India (SEBI)
Reserve Bank of India (RBI)
Income Tax Department of India
Bajaj Finserv Markets
ICICI Bank NRI Services
The primary difference lies in the source of funds and repatriability. NRE accounts are for foreign income and allow full repatriation, whereas NRO accounts handle Indian income and have limited repatriability.
No, NRIs cannot convert an NRO account to an NRE account. These are distinct accounts with different purposes and regulatory treatments.
Yes, but repatriation from NRO accounts is subject to a limit of USD 1 million per financial year and requires submission of appropriate documentation to the bank.
Dividends credited to NRE accounts are repatriable and generally subject to tax withholding. Dividends in NRO accounts are taxable in India with TDS applied.
Limited repatriation and tax implications are key considerations. NRIs should be aware of potential currency risks and comply with Indian tax filing requirements.
