Guide: Income Tax for NRO and NRE Accounts - Learn by Quicko (2024)

FAQs

How much money is tax free in NRO account in India? ›

Taxation. An NRO account is taxed at 30% of the total income accrued in India, as per the Income Tax Act of 1961. Additionally, a cess at 3% is applicable to the overall tax liability. Interest earned through such accounts is also taxable.

As per the FEMA regulations, an NRI will be liable to pay up to 3 times the amount involved in it or Rs. 2 lakh (if the amount is not quantifiable) for not converting a resident account to an NRO account. Moreover, a daily penalty of Rs. 5,000 will be levied from the 1st day of violation of rules.

There is no universal right or wrong account. As an NRI, you should arrive at a decision based on your unique needs and income sources. You can use an NRE bank account to store foreign currency converted to Indian rupees, while an NRO account is used to keep both foreign income and money earned in India.

Taxation of interest on NRE account

Any interest on the NRE account is fully exempt under Section 10(4)(ii) of the Income Tax Act without any limit. Since the interest on such deposits is fully exempt the bank will not deduct any tax on such interest at source.

Is it mandatory to convert to NRO account? If your residency status has changed to NRI, then having your savings account converted to an NRO account is mandated by the law. There are penalties levied if you fail to ensure timely conversion of the savings accounts to an NRO account.

Limitations of NRO Accounts

But the NRE and NRO full form is not the only difference between the two types of accounts. One of the major disadvantages of an NRO account is the cap of USD 1 million on the repatriation of funds. Moreover, the interest income of an NRO account is also subject to taxes.

Limitations of NRE accounts

All transactions made through an NRE Account must be between India and a foreign country, meaning domestic transactions are prohibited. As the currency of the account is usually based on Indian Rupees, there is the risk of currency fluctuations when transferring funds.

The Reserve Bank of India allows the transfer of funds up to USD 1 million a year from an NRO to an NRE account. Here is a list of documents you will require if you are planning transfer funds from an NRO account to an NRE account, according to the IDFC FIRST Bank. Form 15CB - It is a form certified by the CA.

Submitting Form 15G or Form 15H: NRIs can submit Form 15G or Form 15H to the Indian income tax department to avoid TDS on their income if their total income is below the taxable limit. Form 15G is for individuals and HUFs, while Form 15H is for senior citizens.

Do I have to pay tax on NRE fixed deposit in USA? ›

NRE NRO FD interest is taxable. If you have been living in the USA for more than 6 months today, you should add your Indian income like NRE/NRO account interest, PPF interest, rental income, share dividends, mutual fund dividends, or sale profit to your US income tax return.

As a non resident, salary earned for employment exercised outside India and received outside India will not be taxable in India. If salary income for employment exercised outside India is directly received in India, it will be taxable in the country.

NRE/NRO Tax by the Indian Government

NRE account interest income is non-taxable in India. Hence, no tax is withheld/deducted automatically by Indian banks. On the other hand, NRO account interest is taxable at straight 30% plus applicable surcharges and the cess.

Why Open an NRO Account? Opening an NRO account will allow you to: Deposit your savings and earnings from Indian sources such as rent, pension, interest, etc. Repatriate your Indian earnings (up to 1 million USD per financial year) to your country of residence.

Funds originating from a foreign country (foreign currency) can be deposited in both NRE and NRO accounts. However, funds originating in India i.e. in Indian Rupees or INR can be deposited only in NRO Accounts and not an NRE Account.

NRE accounts are ideal for inward remittances (foreign earnings) and freely repatriable. However, upon your return to India permanently, you will have to convert your existing NRO / NRE savings account and deposits into resident savings account and deposits.