NRO stands for Non Resident Ordinary account. It is used to park India based earnings in Rupees in India. An NRO account can be opened by an NRI in a single name or jointly with a resident.
NRE stands for Non Resident External account. It is used to park the overseas earnings remitted to India and converted to Indian Rupees.
People sometimes get confused between NRO account and an NRE account. The basic difference between the two is that an NRO account is used to park the India based earnings in Rupees whereas the NRE account is used to park the overseas earnings remitted to India.
Tax treatment of NRO and NRE
Interest earned in NRE account is Tax free in India whereas any interest earned in NRO account will be applicable to TDS at the rate of 30.9% (Plus surcharge if any). There is no way of preventing the deduction of TDS from the interest earned on the NRO account.
Repatriation: NRE account is freely repatriable (both principal and interest earned) whereas NRO account has the restricted 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 case of NRE account.
Account holding: NRE account can be jointly held with another NRI but not with an Indian resident whereas an NRO account can be held jointly with NRI as well as an Indian resident.
Every NRI will have to combine all the incomes earned or accrued in India and if such income exceeds Rs. 2,50,000, the Income Tax Return is to be filed by them. It is to be noted that if the total income of the NRI in India is below the basic exemption limit, then he/she will have to file an Income tax return to claim the refund of the TDS deducted on the interest earned on the NRO account.
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 as we mentioned earlier that 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. The refund can only be claimed by filing an Income tax return on Income Tax Portal.
In case of NRE account, both principal and interest are repatriable. Whereas in case of NRO account, only interest earned on principle is repatriable and not the principal amount itself.
Interest earned in NRE account is not taxable in India. However, Interest earned in NRO account is taxable in India and will be liable for TDS.
As per FEMA rules, the penalty for not converting resident account to an NRO account is up to 3 times the amount involved in it or Rs 2 lakh when the sum is not quantifiable.