NRE vs NRO Account: Which One for Unlisted Share Investment?

For NRIs who want to make investments in unlisted Indian companies including pre-IPO stocks, shares in startups or even shares held in family businesses in India, the decision between using an NRE account vs. NRO account becomes more significant than mere banking procedures. The reason is that the account you choose determines whether your investment and its proceeds can leave India in the future.

Key Difference

An NRE (Non-Resident External) account holds money earned outside India, such as an overseas salary or business income. Both the balance and the interest are fully and freely repatriable, and the interest is tax-exempt in India. An NRO (Non-Resident Ordinary) account holds income earned in India, such as rent, dividends, pension or proceeds from selling Indian assets. NRO interest is taxable, and the balance can be sent abroad only up to USD 1 million per financial year (April–March), after paying applicable taxes and submitting Forms 15CA and 15CB.

Why It Matters More for Unlisted Shares

Where it comes to listed equity, there is flexibility if even if you used the account-you can unwind slowly and spread out your repatriations. The exit will be in one big transaction due to either a M&A deal, secondary sale pre-IPO,or listing of the company itself. And if that money is stuck inside your NRO structure, the limit is USD 1 million per year irrespective of size of that transaction, and you are reconciling taxes with a CA before moving rupees. In case of a large exit, it means that you will need multiple years for repatriation.

There is alsoan initialconsideration related to structuring under FEMA rules. Whenever you are buying unlisted shares in India, the source of your funds is defining whether the RBI will consider it to be repatriable or non-repatriable investment from the very beginning. Investments made from NRE or directly transferred to India is considered repatriable investment and reported to RBI as such in Form FC-GPR. On the other hand, investments made from an NRO account will automatically be considered non-repatriable — not your bank account but your shares.

Pricing Still Applies Either Way

It is true irrespective of whether any of the accounts makes the investment, that the pricing guidelines of the FEMA will apply to the unlisted shares, and therefore, the issue price cannot be less than the fair value as per internationally accepted valuations and the price to the resident at the time of transfer cannot be more than the fair value. The valuation certificate from a chartered accountant is normally obtained for both entries and exits, so the process is common to all accounts.

The Practical Call

Where the capital comes from overseas and there is any possibility that you may wish to take out the capital gains from the investment made from outside of India, then it would be advisable to make the investments through NRE accounts as it leaves more optionality for you in the future without requiring any further approval. In case the investment isfinancedthrough Indian earnings and repatriation is not a concern, then you can go ahead with the NRO investment.

There is one exception that should be noted for any investor who might be giving this advice to someone else – that is, the transfers of NRO to NRE can take place up to a limit of USD 1 million per year, so NRO investment will not lock you into something you cannot get out of.