NRIs weigh NRE vs NRO accounts as mutual fund flows rise: Experts outline tax, repatriation advantages

Non-resident Indians (NRIs) are increasingly investing in Indian mutual funds, but the choice between using an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account continues to be a crucial factor influencing tax efficiency, liquidity, and repatriation flexibility. Recent expert assessments suggest that while both routes allow access to the Indian capital market, the operational and tax implications differ sharply—and can significantly influence long-term wealth outcomes.

Industry specialists note that the suitability of each account type depends on the source of funds, repatriation priorities, and the investor’s overall global financial strategy. For many NRIs, the decision is no longer just procedural—it directly impacts net returns and ease of moving funds back overseas.

NRE accounts

NRE accounts continue to offer clear advantages for NRIs looking for tax-neutral and widely flexible routes to invest in India. Since NRE accounts are funded exclusively through foreign income or transfers from other NRE/FCNR accounts, both the principal and interest are freely repatriable without limit. Additionally, interest earned on NRE deposits is exempt from Indian tax under Section 10(4) of the Income-tax Act as long as the individual retains NRI or RNOR status.

CA Niyati Shah, Vertical Head – Personal Tax at 1 Finance, said NRE accounts align closely with FEMA’s framework for unrestricted movement of foreign capital. “Funds in an NRE account are maintained in rupees but originate from foreign remittances; hence, both the principal and interest are fully repatriable. Moreover, the interest earned on NRE deposits enjoys tax exemption, making it suitable for NRIs who want tax-efficient capital parking,” she said.

Highlighting the regulatory advantage, CA Akshay Jain, Direct Tax Partner at NPV & Associates LLP, added: “There is no RBI restriction on repatriation from an NRE account. An NRI can remit back any amount if the investment is made from NRE funds. This enables free movement of capital with minimal compliance.”

For NRIs in high-tax countries, the tax exemption on NRE interest also helps avoid dual taxation. Several banks additionally offer preferential services and integrated investment options through NRE accounts, facilitating seamless mutual fund investments and repatriable asset allocation.

NRO accounts

NRO accounts are designed to handle income generated within India—such as rent, dividends, pensions, or business receipts. However, they carry greater tax implications and tighter repatriation rules.

Interest earned on NRO balances is fully taxable in India at slab rates and subject to TDS of 30% plus surcharge and cess. Even if treaty relief is available, NRIs must furnish detailed documentation, including a Tax Residency Certificate (TRC).

According to Niyati Shah, NRO accounts also involve stringent limits on outward remittances. “Repatriation from NRO accounts is capped at USD 1 million per financial year and requires CA certification in Form 15CB, submission of Form 15CA, and proof of tax compliance. This makes the process documentation-heavy and time-consuming,” she said.

Akshay Jain echoed this view: “NRO balances represent taxable Indian income; hence interest is taxed at slab rates with TDS, and repatriation requires Form 15CA/CB plus a USD 1 million cap. These restrictions reduce flexibility for strategies requiring frequent offshore transfers.”

Mutual fund taxation

Experts emphasise that capital gains taxation on mutual funds remains identical irrespective of whether investments are made via an NRE or NRO account. The distinction lies not in investment taxation but in repatriation and operational convenience.

Therefore, NRIs choosing between the two accounts should base their decision primarily on:

Source of funds (foreign vs. Indian income)

Repatriation needs and frequency

Tax-efficiency of interest earned

Compliance appetite and documentation requirements

Capital gains from mutual funds taxed for NRIs

Capital gains taxation for NRIs investing in mutual funds is identical whether investments are routed through NRE or NRO accounts, said Niyati Shah, noting that tax depends only on the fund type and holding period. For equity mutual funds, long-term gains (held over 12 months) are taxed at 12.5% above ₹1.25 lakh, while short-term gains attract 20%. Mutual fund houses also deduct TDS at prescribed NRI rates. CA Akshay Jain added that repatriation differs—NRE redemptions are fully repatriable, while NRO proceeds are subject to the USD 1 million annual limit—but the tax treatment remains the same.

NRI investors should note

NRE accounts remain the preferred choice for NRIs investing with foreign income, offering tax-free interest and unrestricted repatriation. NRO accounts, while necessary for India-sourced income, carry higher tax exposure and compliance requirements.

For NRIs building global portfolios, experts advise evaluating long-term repatriation goals and the tax impact before selecting the investment route.