Tuesday, December 20, 2016

Is NRO Account Taxable in India - Saving and Fixed Deposit

Yes, NRO account is taxable in India. Both interests earned on NRO saving account and NRO fixed deposit are taxable under income tax law of India at the rate of 30% plus applicable cess and surcharge, which comes around 30.9%. Compared to resident saving account this quite high and enough to wipe out one-third of your interest earned in NRO account. This means you should not put additional money on NRO account especially avoid remitting money to NRO account, instead send money to your NRE account because interest earned on NRE account is not taxable.


You should only use NRO account to deposit Indian currency because NRE account doesn't accept INR deposit. You can keep your rental income, cash gifts received from parents and spouse and other transaction which you do in INR.

You can even use NRO account to deposit old Rs 500/1000 notes until 30th December, as they are not allowed to be deposited in NRE accounts.




NRO Account Tax Implications

One of the most frequently asked question among NRI community is what are the tax implications of your funds lying in NRE and NRO accounts? Well, funds in NRE account are tax-free in India for NRI and RNOR but when you become a resident of India you need to pay tax on interest earned on NRE account too.

On the other hand if you want to remit the money from NRE account to overseas i.e in your country of living, the interest earned will be seen as your income and you need to pay taxes in your country of resident e.g. if you send money from NRE account to the USA, you need to show that your income for that particular year and pay taxes to IRS in the USA.


Coming back to NRO account, there is no tax applicable in India on funds lying in your NRO account but you need to pay tax on interest earned on NRO saving account or NRO fixed deposit.

The interest earned is also eligible for TDS and bank deduct tax at the rate of 30% plus applicable cess and surcharge, which comes around 30.9% in total. for example, if you earned 1,00,000 INR in FYI 2016-17 in NRO account then the bank will deduct 30,900 INR as a tax. See this article to learn more about how TDS is deducted on NRO accounts.

If the interest earned in NRO account, both saving and fixed deposit exceeds 10 lakh during the financial year then an additional surcharge of 10% would also be applicable.


NRO Account tax deduct at source
As I said NRO account is taxable in India and interest earned on that account is also subject to tax deduction at source or TDS. The TDS rate for NRO account is quite high and interest earned on NRO account e.g. NRO saving account or NRO fixed deposit are charged at 30.9% which includes maximum income tax rate of 30% plus applicable cess and surcharges.

If your interest earned is more than 10 lakh in NRO account in a financial year then additional 10% surcharge would be applied.

Is NRO Account Taxable in India - Saving and Fixed Deposit


NRO Account Tax Exemption

You can ask for tax exemption in NRO account by means of DTAA. The DTAA stands for Double Taxation Avoidance Agreement. In case your country of residence e.g. USA or Singapore has signed DTAA treaty and you have already paid tax on interest earned on NRO account in your country of residence, which sometimes reduce overall tax paid on interest earned on NRO account, you can ask the bank to apply a concessional rate of TDS. To avail the benefit of DTAA in India, you need to submit the tax residency certification (TRC) along with For 10F and your PAN (Permanent Account Number), without PAN, you cannot avail the benefit of DTAA. See here to learn more about how to save tax on NRO fixed deposit using DTAA in India.

If your country of residence doesn't provide tax residency certification then you can submit your unique tax reference number of the unique identification number in that country.


Should NRI file income tax return for interest earned in NRO Account?
There is often a scenario where only income for an NRI in India is the interest earned on NRO account, mostly because interest on NRE account is not taxable and even if that exceed the basic exemption limit of 2.5 lakh they are not counted towards taxable income of NRI in India. So, if you have earned 1 lakh INR interest in the current financial year in NRO fixed deposit and 30,000 TDS is already deducted, you can file income tax return to claim that 30000 because you don't need to pay any income tax if your income in India is less than 2.5 lakh.

Since a tax refund can only be asked by filling income tax returns (ITR), you should file to get the money deducted as part of TDS back. You can't even use the traditional tricks to avoid TDS with NRO fixed deposits.

Now, if you have other income e.g. rental income or dividend income then you can combine all those and file income tax returns. You can put the details of TDS as perform 26AS and see if you need to pay any additional tax or not. If you have done some tax saving investment, mostly you are eligible for the tax refund in India.


Can you remit money from abroad to NRO account ? is it Taxable?
Yes, you can send money to NRO account from USA, Canada, Singapore or anywhere overseas. There is no tax implication on that provided you are sending the money to your own NRO account. If you are sending to someone else's NRO account, which is not your parents, spouse or children then that would be considered as income for them and they have to pay tax on the money they received as part of total income for that financial year.

If you send money to NRO account of your wife then it would be considered as a gift and they don't have to pay any income tax on that, but again interest earned on that amount will be taxable.

In a similar way, NRIs can also send money to a normal saving account of their parents. It would be considered as a gift and they don't have to pay any tax on the amount received. But, if they invest that money in Resident or NRI fixed deposit then they have to pay tax on interest earned.


That's all about whether NRO Account Taxable in India or not. In short, interest earned on NRO saving account and NRO fixed deposit is taxable in India as both are considered income in India and taxable under income tax law. The interest earned on NRO fixed deposit is also subject to tax deduction at source and charged at higher TDS rate of 30% plus applicable cess and surcharge. If the interest earned on NRO fixed deposit is higher than 10 lakh INR or 15,000 USD in a financial year then an additional surcharge of 10% would also be applicable.

19 comments:

  1. Is the interest earned in NRO a/c taxable in USA also? Should it be declared there also for filing tax return in USA? Since double taxation is not permitted, only the difference in tax between US & India need to be paid in US. Is this correct

    ReplyDelete
    Replies
    1. I think DTAA is permitted between India and USA. You can pay tax on USA and then submit proof in India along with DTAA form and bank will reduce TDS on your NRO fixed deposit or saving account accordingly.

      Delete
  2. I am a pensioner from India, now a US citizen living permanently in USA. I also earn some income through my bank FDs. Together it exceeds the tax threshold limit and hence I file my returns accordingly in India (and also report the same in USA). Now it has become mandatory for me to convert my regular savings bank account to NRO account because my status is of NRI. Now the NRO account will attract 30 % interest which is what I am worried about. My accountant in India says, that when he will file my returns with 30% tax deduction, I can get it refunded, due to this excess taxation. How far this is true and does it work like that? Due to this 30% taxation, many senior pensioners who have moved to USA/ elsewhere try to avoid converting their regular account to NRO account as it literally wipes out their interest income on their lifetime savings which is unfair. Please enlighten us on this very crucial topic. Thanks- RS

    ReplyDelete
  3. Hello RS,

    Since you are an USA citizen I am assuming you also pay tax on your interest income earned in India on USA as it charge tax on global income for citizens, hence you are eligible for DTAA tax avoidation . I assume you can submit DTAA documents e.g. tax residency certificate and reduce TDS rate to 20% + applicable cess and surcharge. Yes, you can always get refund by filling tax return if you have paid more tax. See

    ReplyDelete
  4. Dear Sir,
    I have a query regarding the PF deposit in my NRO account.
    Before moving abroad, I had applied for PF withdrawal & bank details was provided. I learned recently that my saving account is now converted to NRO account. Will the deposit of PF amount in NRO account will attract taxes?
    Regards,

    ReplyDelete
    Replies
    1. Hello Anonymous,
      The PF deposit into NRO account will not attract tax if it is less than 50,000 i.e. no TDS but if it is more than that then it will attract tax given its a pre-mature PPF withdrawal.

      Delete
    2. Dear Sir,
      My PF amount (not PPF) is more than 50,000. Is there any solution to avoid this tax?
      Regards,

      Delete
  5. Hi Sir,
    I am Resident in UAE last 5 years. Previously, I had no NRE account and I transferred my money normal saving account. Now I have NRE account I am continue the same last 2 years.
    Please suggest my problem are as below.
    • Transferred amount in first 3 year in my saving account can be movable in my current NRE account? (I have my all transfer record)
    • If I convert my saving account to NRO account then my fixed deposit interest will be charged as per NRO TDS rules. So in that case NRO account accept the “DATA declaration form”, if accept then there is no deduction on fixed deposit interest.
    • NRO account Deducted TDS is refundable, if I submitted my income tax return file.
    • Or if you have any suggestion to avoid NRO tax deduction.
    Thanks,

    ReplyDelete
    Replies
    1. • Transferred amount in first 3 year in my saving account can be movable in my current NRE account? (I have my all transfer record)

      No you cannot transfer money from normal saving account to NRE account

      • If I convert my saving account to NRO account then my fixed deposit interest will be charged as per NRO TDS rules. So in that case NRO account accept the “DATA declaration form”, if accept then there is no deduction on fixed deposit interest.

      Yes, you can avail DTAA benefit but that means TDS will reduced to 20% rather than 30%

      • NRO account Deducted TDS is refundable, if I submitted my income tax return file.
      Yes, TDS will be refunded if you submit income tax return

      • Or if you have any suggestion to avoid NRO tax deduction.
      DTAA and PAN card submission can reduce TDS rate

      Delete
  6. Hi,

    Thanks for the informative article. As per the article my understanding is that only Interest earned on deposit in NRO Account is taxable and not on the amount deposited into the NRO.

    Consider a scenario, as an NRI, if I sell a piece of land in India for say 10 Lakhs, and that amount I put in my NRO account. As per the above, the understanding is that interest is taxed at 30%, say I get an interest of 70000 INR from the Sale amount deposited, I will be only taxed 30% of INR 70000 interest earned in the financial year and not on the 10Lks which I received in my NRO account. AM I right in my understanding.

    Thanks for your support and explanation.

    ReplyDelete
    Replies
    1. Hello @Anonymous,
      Yes, TDS will only be deducted on the interest earned on NRO fixed deposit i.e. the 70000 INR you will earn on that financial year but that doesn't mean you don't need to pay tax on any income you made by selling property. You need to pay capital gain tax on your property and for that you need to file income tax return as well. See my article http://savingsfunda.blogspot.sg/2017/01/selling-properties-in-india-what-nri.html for more details.

      Delete
  7. Is DTAA benefit applicable to interest earned on NRO savings account or is it limited to only interest earned on NRO deposits ?

    ReplyDelete
    Replies
    1. Hello @Anonymous, it is applicable for any interest earned, so both NRO saving account and NRO deposits are covered.

      Delete
  8. Hi,

    Can I open a FD in my NRE account? Also, can NSC maturity amount be deposited into NRO account?

    ReplyDelete
    Replies
    1. Yes, you can open FD in your NRE account and yes, NSC maturity amount can be deposited into NRO account.

      Delete
  9. Hi Sir,
    I was did some fixed deposits in State Bank of India in NRE account. In case I return to India before maturity dates of these do I have to pay income tax on those interest earned in FD?
    Example: - In 01/01/2014 Rs. 1000000 (10 Lakhs) start fixed deposit. Maturity dates Rs. 1900000 (19 Lakhs) in 01/01/2024.
    If I plan come back to India 2020, so I assume that my NRE account will be converted as normal saving account.
    Please advise below points,
    • Scenes my all NRE FD are maturity are 2024, but I came back in India 2019. So I have to pay tax against Rs. 9 Lakhs (interest earned in FD), which is 3.6 lakhs (based on current TDS 40%)
    • What is the best way to do NRE FD, yearly or long term(i.e. 10 years)

    ReplyDelete
    Replies
    1. Hello @Anonymous, Once you come to India, your residential status may not be resident but can be RNOR as well, depending upon how many years you have been outside India. See this flowchart to find out your exact residential status.

      If you become RNOR, you can continue NRE fixed deposit for another 1 to 2 years until you become resident. But, if you have are not RNOR, you need to inform bank about your residential status and then will convert your NRE FD To normal FD.

      I don't think you need to pay tax for first few years, when you are NRI but only on interest you earned after becoming resident India.

      Btw, this is complex to explain to authorities, hence yearly NRE FD is best.

      Delete
  10. Hi Sir, I have an NRE account in BOI. But it has now become dormant and they are asking for Aadhaar card and KYC form for making it active. how can an nri obtain aadhaar card? I can send them KYC form and pan card copy. Also, I want to close my account with them as they are giving very poor service. Till now I don't have online account and they don't update me anything on my international mobile. They each time ask for an Indian mobile both for online/sending updates. How can an NRI have this? Many thanks in advance for your reply.

    ReplyDelete