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.

No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...