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A Non-resident Indian or an NRI can have an operational account in India. Even if you do not reside in the country and have an NRI status, you can still earn an income here, manage your finances, and even buy NRI insurance in India.
However, the accounts you can open and operate differ from regular savings accounts. Additionally, the tax* implications on NRI accounts differ from domestic ones.
As an NRI, you can open a Non-resident External (NRE) account, Foreign Currency Non-resident (FCNR) account, or a Non-resident Ordinary (NRO) account.
An NRO account is a must to deposit any kind of income earned by an NRI in India. Therefore, it is essential to understand the NRO account tax implications to ensure compliance with the tax laws in the country.
Here is a detailed explanation of an NRO account and the NRO account tax for your understanding.
What is an NRO Account?
An NRI can set up an NRO account as a savings account, current account, or fixed deposit account in India. The currency of the funds held in an NRO account is the Indian rupee. However, there is no currency restriction to the remittances in an NRO account, and they can be either in Indian or foreign currency.
As an NRI, you can receive income and earnings, and payments for expenses in India in your NRO account. An NRO account can be opened to manage deposits and income earned in India from multiple sources such as rent, salaries, dividends, consulting fees, pension, etc. Moreover, you can appoint an individual to manage your NRO account when you are abroad.
Benefits of an NRO Account
It allows you to manage your earnings in India and earn interest on the deposits.
It creates investment opportunities for you. For example, you can invest directly in mutual funds, collect rent, and make other transactions even when not in India.
An NRO account can be an individual or a joint account.
Restrictions of an NRO Account
You cannot repatriate more than 1 million USD in a given financial year from an NRO account.
Moreover, the money held in an NRO account is not freely repatriable.
The interest income you generate from an NRO account is subject to income tax in the country.
Tax Implications on an NRO Account
As stated above, an NRI must pay taxes on the income earned in India. A few examples of the funds accrued through investment, interests, and dividends that are taxable are:
Capital gains levied on investments in the country
Consulting fees or salary earned here
Rent earned from a property in India
Interest earned on an NRO account or investment
The TDS on an NRO account is applicable at the NRO tax rate of 30% (plus additional cess and surcharge wherever applicable). The bank where you hold your NRO account deducts the TDS on the interest you earn and credits the remaining amount to your account.
Here are some key pointers about tax implications on an NRO account:
You can claim TDS credit by filing an income tax return in the country. However, you cannot avoid the deduction of TDS from the NRO account interest. It gets reflected in Form 26AS for NRI taxpayers.
On the other hand, the interest earned on an NRE or FCNR account is exempted from taxes in the country. But, if the NRI becomes an Indian resident in a particular financial year, the entire interest he earns becomes subject to income tax unless allowed otherwise by the RBI.
The principal and interest earned on an NRE account are fully repatriable, which is not the case for an NRO account.
Can the TDS applicable on an NRO Account be Reduced?
There is a provision of Double Taxation Avoidance Agreement (DTAA) in India, which is relevant to NRIs and helps reduce their tax burden. The DTAA is an agreement of the Government of India with more than 75 countries from all over the world, which saves NRIs from paying double taxes in India as well as their country of residence.
According to the DTAA, an NRI has the option to pay income tax under the provisions of the income tax law in India or the provisions of the DTAA, whichever is more beneficial to him.
The DTAA NRO tax rates and rules are different for various countries and usually fall in the range of 10% to 15% for most countries.
If you are an NRI and want to claim a lower tax rate under the DTAA, you submit the following documents:
A self-attested copy of the PAN
The Tax Residency Certificate issued by the tax authorities in your current country of residence.
A self-declaration form (Form 10F)
Further, you can invest in an NRI insurance plan to gain tax benefits on your investment. Deduction of up to ₹1.5 lakhs under Section 80C of the Income Tax Act, 1961, is available for the premium paid towards NRI life insurance plans. Moreover, the maturity amount or death benefit received from an NRI life insurance plan is tax-exempt under Section 10(10D) of the Income Tax Act.
Our Tata AIA life insurance plans are specially designed to extend financial support to your loved ones in your absence. Our NRI insurance plans offer guaranteed1 returns on your investment along with appropriate tax benefits.
However, as the tax laws can change at any time, it is advisable to consult with a tax advisor or financial professional to stay up-to-date with the latest tax provisions based on your circumstances.
Wrapping Up
The income earned by an NRI in India is deposited in an NRO account. NRIs have to pay income tax in India for the total income they earn in the country in a particular financial year if it exceeds the exempted limit of ₹ 2.5 lakhs. Even if the income is less than the exempted limit, they must file a tax and claim a TDS refund on their NRO account.
