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Guide: Income Tax for NRO and NRE Accounts

by | May 15, 2024 | Income Tax, Income Tax for NRI | 0 comments

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Guide: Income Tax for NRO and NRE Accounts

NRO and NRE accounts are essential banking tools for Non-Resident Indians (NRIs) to manage their finances in India. NRO, which stands for Non-Resident Ordinary account, allows NRIs to hold and manage their India-based earnings in Indian Rupees. This account can be opened individually or jointly with a resident.

On the other hand, NRE, which stands for Non-Resident External Account, is where NRIs can deposit their overseas earnings remitted to India and converted into Indian Rupees. It provides a convenient way for NRIs to maintain their funds in India, especially if they plan to repatriate their earnings back to their country of residence.

Both NRO and NRE accounts serve different purposes and come with their own set of features and benefits. Understanding the distinctions between these accounts can help NRIs make informed decisions about how to manage their finances effectively while residing abroad.

Why do we have NRE and NRO Account?

Under the regulations outlined by the Foreign Exchange Management Act (FEMA), Non-Resident Indians are not permitted to maintain savings accounts in their names in India. Instead, they are required to convert all their savings, earned abroad, into either a Non-Resident External Account (NRE) or a Non-Resident Ordinary (NRO) account. Failure to adhere to these guidelines can result in penalties.

Opting to open an NRE or NRO account presents several advantages for Non-Resident Indians:

  1. Facilitates Remittance: NRIs can easily transfer their foreign earnings to India at any time, using these designated accounts.
  2. Facilitates Retention: They can also choose to retain their income earned in India within their home country, utilizing the same accounts.

By complying with FEMA regulations and leveraging NRE or NRO accounts, NRIs can effectively manage their finances and ensure seamless transactions between their home country and India.

Difference between NRO & NRE account

Sr. NoBasisNRONRE
1.Currency TransferINR to INRForeign Currency to INR 
2.Joint Account HolderCan be NRI or resident of IndiaMust be an NRI
3.RemittanceUp to 1 million USD inclusive of taxesNo Limit
4.Fund TransferCan transfer to other NRO account but not to NRE accountCan transfer to NRE, NRO, and FCNR account
5.Tax liabilityInterest earned and credit balances are taxableBoth principal and interest are non-taxable.
6.Type of depositCurrent, savings, fixed and recurringCurrent, savings, fixed and recurring

Tax treatment of NRO and NRE

Interest accrued in the NRO account is subject to taxation in India, with TDS (Tax Deducted at Source) applicable at a rate of 30.9%, which includes a 30% tax rate along with education cess and surcharge, if applicable. The bank automatically deducts TDS on the interest earned in the NRO account and credits the remaining amount to the account. NRIs can claim TDS credit by filing their Income Tax Returns in India, and the deducted TDS is reflected in Form 26AS.

Conversely, interest earned in the NRE account is tax-exempt for NRIs in India. However, if an NRI becomes a resident of India in a financial year, the entire interest becomes taxable unless prior permission is obtained from the Reserve Bank of India (RBI).

Regarding repatriation, funds in the NRE account are freely repatriable, including both the principal amount and the interest earned. On the other hand, the NRO account has certain restrictions on repatriability.

Additionally, NRIs can deposit Rupee funds earned in India into the NRO account, whereas such deposits are not permitted in the NRE account.

It’s important for every NRI to consolidate all income earned or accrued in India. If the total income exceeds Rs. 2,50,000, they are required to file an Income Tax Return in India. Even if the total income is below the basic exemption limit, NRIs must file an Income Tax Return to claim a refund of the TDS deducted on NRO interest income.

Let’s understand this with a scenario:

Vishwa, who went to the UK for higher education last year, had opened an NRO account, and the interest income earned on it amounted to Rs. 1,00,000. Upon checking her Form 26AS, she noticed a TDS entry of Rs. 30,900, deducted from her interest income in the NRO account. Vishwa doesn’t have any other income in India.

Given that Vishwa’s status for the previous year is that of an NRI, only the incomes earned or accrued by her in India are taxable. However, her total income solely consists of the interest income from the NRO account, which amounts to Rs. 1,00,000. As a result, her total income is not taxable in India. It’s worth noting that interest earned in an NRO account is subject to TDS at a rate of 30.9%, while interest earned on an NRE account is entirely exempt.

Since Vishwa doesn’t owe any tax on her total income, she will need to claim a refund for the TDS deducted on her interest income. She can claim this refund by filing an Income Tax Return on the Income Tax Portal.

Read More: DTAA – Double Taxation Avoidance Agreement: Definition, Types, and Benefits

Web Stories: DTAA – Double Taxation Avoidance Agreement: Definition, Types, and Benefits

Official Income Tax Return filing website: https://incometaxindia.gov.in/

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