1. NRE account gives handsome interest rate. The interest is not taxable in India, but will be taxed in US (to confirm). Most important thing to keep in mind is that the investment & returns are subject to rupee/dollar currency fluctuations. If rupee depreciates, you will end up losing money when you repatriate funds to US. This is nicely illustrated here: http://articles.timesofindia.indiatimes.com/2012-05-11/us-canada-news/31668427_1_nre-term-deposit-nre-accounts-savings-account/2
You invested $ 20,000 in a rupee deposit when the rupee was at 53. Let us say that at maturity, after 1 year, the rupee touches 55. Here are your gains:
Principal: $20,000 or Rs 10,60,000 Interest @8%: Rs 84,800 Maturity: Rs 11,44,800 or $ 20815 Gain in dollars: $ 815 or 4%

Thus, if the rupee slips to 55 at the end of one year, your 8% interest rate would translate into a net 4% gain after currency adjustment. If the rupee were to slip further, say to 56, your net gains would further drop to 2%. Instead, had you invested in a dollar deposit, your gains would have been 4% irrespective of currency movement.

FCNR dollar deposits would suit more to an investor who is completely risk averse and looking at investing in India with an at least 3 year horizon. However NRE deposits at current attractive rates may prove to be a better option if one is willing to take the currency risk since the rate differential between a NRE deposit and FCNR is about 500 basis points for 3 year tenure and even higher for lower tenures.”

Mashruwala adds, “If you are certain that you will repatriate the maturity proceeds, then it is best to invest in the FCNR as you protect yourself against currency risk. Conversely, if you are certain that your investment will remain in India, NRE would be a better choice.”

Tax treatment: http://desiways.wordpress.com/tag/nre-accounts/