NRO Account Tax - Tax Implications On NRO Account In India

What are the Different Types of NRI Account?

NRI can open different accounts with banks in India. These are

• Foreign Currency Non-Resident Account (FCNR)
• Non-Resident External account (NRE)
• Non-Resident Ordinary Account (NRO)

The tax liability in India from such accounts depends on the interest amount you earn and type of account you hold.

The first two type of accounts i.e. FCNR and NRE are tax free accounts in India. Yes, you read it right!! No interest amount earned on these two accounts is taxed in India. But when you become a Resident then interest earned on NRE accounts (now converted to Resident Foreign Currency account) shall be taxable for you.

What is an NRO account?

An NRO (Non-Resident Ordinary) account is a type of bank account in India that is available to Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) who are living outside of India. The purpose of the account is to facilitate the management of income earned in India by NRIs and PIOs. An NRO account is a Rupee-denominated bank account suitable for NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs). However, remittances received into the account can be either of a foreign currency or Indian Rupees. The source of income can range from assets or investments in the form of rent, dividends, interest, etc.

Benefits of an NRO Account

1. Manage Indian Earnings: NRO accounts allow you to manage and access your income earned in India, such as salaries, dividends, pensions, or rental income. It serves as a safe and convenient place to hold your funds and conduct various transactions.
2. Earn Interest: The funds deposited in an NRO account can earn interest, providing a source of income on your savings. The interest earned is subject to applicable taxes.
3. Investment Opportunities: With an NRO account, you can explore a variety of investment options, such as mutual funds, fixed deposits, and other securities. This opens up opportunities to grow your wealth while staying connected to India's financial markets.
4. Flexibility: NRO accounts can be opened as individual or joint accounts, providing flexibility in how you manage your finances. You can open a joint account with another non-resident Indian or a resident Indian, such as a family member.
5. Convenient Transactions: The account facilitates seamless banking transactions, including funds transfers, bill payments, and other banking activities. This is particularly useful when you are not physically present in India.
6. Cross-Border Remittances: NRO accounts allow you to repatriate funds back to your country of residence, subject to certain conditions and limits. This can be beneficial when you need to transfer funds internationally.
7. Tax Compliance: NRO accounts help ensure compliance with Indian tax laws for income earned in India. Banks typically withhold taxes at source on interest income, making it easier to manage tax obligations.
8. Access to Other Banking Services: In addition to managing your deposits, NRO accounts provide access to other banking services, such as loans, insurance, and investment advisory.

Restrictions of an NRO Account

• Repatriation Limitations:. NRO account holders can repatriate a maximum of USD 1 million per financial year, which may restrict their ability to move funds freely from their NRO account to their home country or other locations.
• Taxation on Interest Income: The interest income earned on an NRO account is subject to taxes according to the rates applicable in India. This means that the interest earned on the account will be subject to deduction at source (TDS) as per the prevailing tax laws, which can reduce the effective return on the account.
• Tax Compliance and Filing: NRO account holders need to comply with the tax regulations in India, including filing the appropriate tax returns. This can add an additional administrative burden for the account holder.

Is interest earned on NRO account taxable in India?

The interest earned on the NRO account is subject to income tax in India. Currently, the applicable TDS rate is 30% plus surcharge and cess, when the interest accrues on your NRO deposit. So, if you are receiving interest income from your NRO savings bank account (taxable income), India becomes a source country, and you are liable to pay tax here.

File income tax return for FY 2023-24(AY 2024-25) here.

Are there any income tax deductions available to NRI?

Yes, there are income tax deductions available to Non-Resident Indians (NRIs) in India only if he or she opts for old tax regime.Some of the key deductions available to NRIs include:

The interest is tax-free for a resident individual, whereas any interest credited to NRI, irrespective of the amount, is already net of TDS. This means an NRI having interest income from NRO account as the only source of income will get refund of taxes for income upto Rs.10,000/-.

Is NRI having Interest income from NRO account required to file Income Tax Return in India?

Yes, Non-Resident Indians (NRIs) who earn interest income from an NRO account in India are required to file an income tax return in India. Interest earned from an NRO account is taxable in India, and NRIs are expected to pay taxes on this income according to the applicable income tax slabs for the financial year. Although banks typically deduct tax at source (TDS) on interest earned from NRO accounts, the TDS rate for NRIs can be around 30% (plus applicable surcharge and cess), which is higher than the rate for residents.

Despite the TDS, NRIs must file an income tax return if their total income from India exceeds the basic exemption limit of ₹2.5 or 3 lakh for individuals below 60 years of age.

Filing a return allows NRIs to claim a refund if the TDS deducted is more than their actual tax liability. If an NRI has other sources of income from India, such as rent from property, capital gains from asset sales, or other sources, they must also file an income tax return. NRIs should use the appropriate forms, typically ITR-2, and may benefit from consulting a tax advisor or professional to ensure compliance with current tax laws in India.