How are funds saved in an NRO account taxed?

If a non-resident Indian (NRI) has a source of income in India, such as house rent, dividends, pension, etc., they can manage their funds by opening a Non-Resident Ordinary (NRO) account at any bank. For an NRI or any Indian citizen who has earnings abroad, an NRO account provides convenience in managing one’s investment and earning sound returns. However, one should note that an NRO account is subject to taxation in India.

What is an NRO account?

An NRO account is a facility offered to NRIs to manage income they earn in India. An NRI can deposit or receive funds in foreign or Indian currency. However, the money in an NRO account is maintained and withdrawn only in Indian currency. One cannot hold foreign exchange in the account.

Taxation of NRO account

Any income earned from an NRO account is taxable in India, regardless of where the accountholder resides. There are various types of accounts provided under the non-residential rupee ordinary category such as current accounts, savings accounts, recurring accounts, fixed deposits, etc. The tax rate applicable for an NRO account, including the principal and interest earned, is 30% for NRIs. Additional surcharge and cess of 3% are also applicable.

Taxation of interest on NRO account

The interest one gets in an NRO account and credit balances will be subject to income tax according to the applicable tax slab. A 30% TDS (Tax Deducted at Source) is deducted by the bank, when the interest gets credited to the account. No TDS is applicable if the interest earned is less than Rs 50,000 in a financial year.

Taxation exemptions for NRIs

NRIs can avail of tax exemption on the tax on interest earned in an NRO account under section 80TTA of the Income Tax Act. According to Section 80TTA, the maximum deduction allowed on the interest earned from the savings account is Rs 10,000. If an individual has multiple savings accounts at various banks, the maximum deduction for all savings accounts combined should not exceed Rs 10,000.

Taxation on transfer of funds from an NRO account

NRIs must know the tax implications of transferring funds from an NRO account to any foreign account. TDS at the rate of 10% will be applicable on the transfer of funds from an NRO account to a foreign account. The rate will be the same, irrespective of the amount of funds transferred. This tax is levied on the gross amount of the funds transferred. The tax amount will be deducted by the bank from the transferred amount.

Foreign Exchange Management Act (FEMA) regulations

NRIs can invest through an NRO account only according to the provision of the Foreign Exchange Management Act (FEMA). They must seek approval from the Reserve Bank of India (RBI) before making any investments. An NRI can use the NRO account to invest in term deposits such as fixed and recurring deposit investments.

Features of NRO account

• NRIs are allowed to transfer funds from their NRO account to their NRE (Non-Resident External) account. An NRE account is a repatriable account where one can transfer foreign earnings and transfer funds back to the foreign account without any restrictions.
• One can link the NRO account to a UPI payment system. There are limitations on the amount transferred per day.
• An interest rate of 9% is applicable on NRO fixed deposits. An NRI can convert their resident savings account to an NRO account.