NRO stands for Non-Resident Ordinary account while NRE stands for Non-Resident External Account. An NRI can park India based earnings in Rupees in India under an NRO account. The NRI can open an NRO account in a single name or jointly with a resident. An NRI can park the overseas earnings remitted to India and converted to Indian Rupees under an NRE account.
Why do we have NRE and NRO Account?
As per the FEMA guidelines, a Non-Resident Indian cannot have a savings account in his or her name in India. He/She must convert all their savings (money earned abroad) to a Non-Resident External Account (NRE) or Non-Resident Ordinary (NRO) account. Therefore, continuing to use the savings account in India can attract penalties. Opening an NRE or NRO account is, hence, a good option for Non-Resident Indians. It can help NRIs in two ways:
- They can send their foreign earnings to India at any point of time.
- They can also retain their income from India in the home country itself.
Difference between NRO & NRE account
| Sr. No | Basis | NRO | NRE |
| 1. | Currency Transfer | INR to INR | Foreign Currency to INR |
| 2. | Joint Account Holder | Can be NRI or resident of India | Must be an NRI |
| 3. | Remittance | Up to 1 million USD inclusive of taxes | No Limit |
| 4. | Fund Transfer | Can transfer to other NRO account but not to NRE account | Can transfer to NRE, NRO, and FCNR account |
| 5. | Tax liability | Interest earned and credit balances are taxable | Both principal and interest are non-taxable. |
| 6. | Type of deposit | Current, savings, fixed and recurring | Current, savings, fixed and recurring |
Tax treatment of NRO and NRE
Interest earned in the NRO account is taxable in India. TDS on such interest is applicable at the rate of 30.9% (30% tax rate + education cess & surcharge if any). The bank deducts TDS on NRO interest and credits the remaining amount to the NRO account. The NRI can claim TDS credit by filing the Income Tax Return in India. The deducted TDS is reflected in Form 26AS of the NRI taxpayer. There is no way of preventing the deduction of TDS from the interest earned on the NRO account.
Interest earned in the NRE account is exempt from tax for NRIs in India. If the NRI becomes a resident of India in a financial year, the entire interest would be taxable unless the taxpayer takes prior permission from RBI.
Repatriation: NRE account is freely repatriable (both principal and interest earned) whereas the NRO account has restrictions on repatriability.
Deposit of Rupee funds generated in India: An NRI can deposit the Rupee funds which are earned in India, in the NRO account whereas deposit of such funds is not permitted in the case of NRE account.
Every NRI will have to combine all the incomes earned or accrued in India and if such income exceeds Rs. 2,50,000, they must file the Income Tax Return in India. Even if the total income of the NRI in India is below the basic exemption limit, they must file an Income Tax Return to claim the refund of the TDS deducted on NRO interest income.
Let’s understand this with a scenario:
Vishwa went to UK to pursue higher education last year. She had opened an NRO account on which her interest income was Rs. 1,00,000. She checked her 26AS and found a TDS entry of Rs. 30,900/- which was deducted from her interest income in NRO account. Vishwa does not have any other income in India.
Since Vishwa’s status for the previous year is NRI, only the incomes earned or accrued by her in India shall be taxable in India. However, her total income comprises of only the interest income from the NRO account which is Rs. 1,00,000. So, her total income is not taxable in India. But the Interest earned in an NRO account will be applicable to TDS at the rate of 30.9% whereas the interest earned on an NRE account will be completely exempt.
Since no tax is payable by her on her total income, Vishwa will have to claim the refund for the TDS deducted on her interest income. She can claim the refunds for TDS by filing an Income Tax Return on Income Tax Portal.
FAQs
The Interest on the NRO account is taxable in India. As per the Income Tax Act, if the total income of a taxpayer is less than the basic exemption limit of INR 2.5 lacs, it is not mandatory to file ITR. Thus, an NRI should file ITR in India:
* If Total Income exceeds basic exemption limit of INR 2.5 lacs
* To claim a refund of TDS deducted by the bank on NRO Interest
In the case of an NRE account, both principal and interest are repatriable. Whereas in the case of an NRO account, only interest earned on principal is repatriable and not the principal amount itself.
Interest in an NRE account is not taxable in India. However, Interest on the NRO account is taxable in India and will be liable for TDS.
As per FEMA rules, the penalty for not converting a resident account to an NRO account is up to 3 times the amount in the account or INR 2 lakh when the sum is not quantifiable.