NRO Account Tax Implications in India

If a Non-Resident Indian lives in India, they must manage their account in India for financial transactions. Through a Non-Residential Ordinary (NRO) account, an NRI receives Income in India.

Before opening an NRO account, you need to understand all the tax implications in India to ensure you are complying with all income tax rules and regulations. 

In this blog, we will see the taxation of NRO accounts in India and what the interest, TDS, and filing rules are for an NRO account in India. 

What is an NRO Account?

 An NRO account is an account available to Non-Resident Indians and persons of Indian origin living outside India. They can open a savings account, a current account, or a Fixed Deposit in which your funds are in Indian currency. 

In an NRO account, you can earn income from sources such as interest, dividends, rental payments, and pensions. 

The funds in the NRO account can be in Indian currency or in foreign currency. It can be used for expenditure payments and for receiving income in India. 

According to the Foreign Exchange Management Act (FEMA), the primary purpose of the NRO account is to manage the income that a non-resident Indian or a person of Indian origin gets in India. 

The earnings you earn in your NRO account are subject to Indian taxation. You can only send money up to 1 million USD in a financial year. 

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Taxation on NRO Accounts 

If you have an NRO account, then you have to pay the taxes on the interest that you earn from your savings account in your NRO account. Here are some examples given in which you need to pay tax on your NRO account. 

• You need to pay taxes on capital gains from investments in India. 
• You are liable to pay the taxes on the consulting fees and salary which you earn in India. 
• If you receive rental property from any foreign property in India. 
• On the interest that you get from your NRO account on any deposit. 

Key Points for NRO Account Taxation 

Here are some key points on NRO account taxation to remember. 

• No matter the weather, whether you work in India or outside India, and whether you receive earnings in your NRO account, they will be taxed in India under Indian Income Tax laws. 
• The earnings you receive through your bank, with TDS deducted from your NRO account, will be taxed at a 30% rate, along with applicable cess and surcharge. The actual tax liability depends on your total income and the appropriate rates. 
• You can claim the taxation benefits under the Double Taxation Avoidance Agreement (DTAA) by submitting a TRC, Form 10F and other valid documents, which will help you to prevent paying tax twice on the same income, and claim the tax credits while filing your taxes in your country of residence. 

Key Features of an NRO Account

Given below are some of the key features of the NRO account: 

• If any deposits are made in your NRO account in foreign currency or Indian currency, then it will be converted into Indian rupees. 
• You can withdraw funds only in Indian currency from an NRO account. 
• Any interest that you will get in your NRO account is subject to Indian Income tax laws. 

Benefits of an NRO Account in India

If you have an NRO account in India, then you can have many benefits of an NRO account, which are given below: 

• Manage Income: Through your NRO account, you can manage your Indian earnings, which include salaries, dividends, pensions, or any rental income from property. An NRO account is a safe, secure place to hold your funds and conduct various financial transactions. 
• Earn Interest on NRO account: You can earn interest on your NRO account on the savings by providing an income source. However, the interest you earn is subject to Indian taxation, and you need to pay tax on the interest you receive through your NRO account. 
• Account flexibility: An NRO account can be opened as a joint or individual account, making it more flexible and helping you manage your finances more easily. You can open an NRO joint account with an Indian resident or a Non-resident. 
• Investment options: Through the NRO account, you can access various investment opportunities like mutual funds, equities, fixed deposits, and securities. It will help to grow wealth more securely and rapidly through connection to the Indian financial markets. 
• Tax Compliance: On the NRO account, interest earned is taxable under Indian Income Tax laws. Banks withhold tax at source on your interest income, which makes your taxation of the NRO account easy and simple. 
• Cross-Border Transfers: With an NRO account, you can easily transfer funds to your country of residence, which are also subject to the limits and conditions of the Indian tax laws. 
• Easy Transition: An NRO can be used to transfer the funds easily to the various financial services, like bill payments, for any payments of expenses, or other banking activities.

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Documents You Will Need for an NRO Account

Here is the list of documents that you will need to open a Non-Resident Ordinary (NRO) account in India. 

• You need to provide your valid passport, with a copy of the first page and the address page. 
• Submit your valid visa, Overseas Citizenship of India (OCI) card, or any resident ID. 
• Proof of foreign address, which includes a letter from the employer, company ID, offer letter, foreign driving licenses, utility bill, etc. 
• You need to provide your original bank account statements for the past 3 months from your foreign bank account or an NRE bank in India, with a proper bank seal. 
• You need to submit your valid PAN card to open your NRO account in India. 

Here is the list of documents you will need to claim the NRO account benefits. 

• You need to provide your tax residency certificate, which is issued by your country of residence. 
• You need to submit your self-declaration form to your Chartered Accountant (CA) for the deduction of TDS in India. 

Differences Between an NRO Account and an NRE Account

Here are the differences between the NRO account and the NRE account, given in a table format: 

Restrictions of an NRO Account in India

Here are some of the restrictions of an NRO account in India which are given below: 

• Taxation on the Interest Income: If you get interest on the deposited amount in your NRO account, then you will be subject to Indian taxation under the Indian income tax laws. It means that your interest in the NRO account will be subject to TDS (tax deducted at source) according to the Indian tax laws, and it can result in reducing your return on your NRO account. 
• Transfer limit: On an NRO account, you can only repatriate funds up to 1 million USD in a financial year. This means you can repatriate only limited funds from your NRO account, which restricts your ability to send funds to your country of residence. 
• Tax filing: As an NRO account holder, you need to follow all the rules and regulations of the Indian tax laws and fill your tax return correctly. 

Deductions Available to the NRIs

Here is the list of deductions which are available to the NRIs, given in a table format:

Do NRIs Need to File Tax Returns for NRO Interest?

Yes, a Non-resident Indian needs to file the Income tax return for the interest that they get on the deposit amount in the NRO account. 

The interest they earn on the deposited amount in the NRO account is taxable in India. They have to pay interest tax according to the Indian tax scales under the Indian income tax laws. Along with it, they will also be charged TDS (Tax Deducted at Source) by Indian banks, usually 30%, which includes applicable cess and surcharges, which can be higher than the Indian resident rates. 

Apart from the TDS, an NRI must file an Income tax return if the sum of their annual income is more than the fundamental limit, which is INR 2.5 lakh (under the old tax regime) for individuals who are less the age of 60 years old, and INR 3 lakh for individuals under the new regime. 

You must file an ITR to claim a refund. If TDS is deducted in excess of the original tax liability, you can get a refund by filing the ITR. Furthermore, if an NRI has various sources of income in India, such as rental income from property in India, capital gains from the sale of assets, or income from any business in India, they must file the ITR. They can use the ITR-2. 

Final Thoughts 

An NRO account is one of the best choices for NRIs, as it helps them keep their foreign holdings in Indian currency and makes it easy to manage their finances in India. They have to pay tax on the interest on the income deposited in their NRO account, according to Indian income tax laws. 

For all this, Visament is here to help you file your ITR and provide an easy, smooth NRO account process, from documentation to repatriating funds. Visament ensures and manages all your tax implications of opening an NRO account as an NRI in India, and enables easy, error-free financial transactions. 

You can take help from the Visament experts, who are ready to assist you 24/7 and resolve your queries and doubts within a few minutes.