Non-Resident Indians (NRIs) can continue to maintain bank accounts in India even after moving abroad. An NRO (Non-Resident Ordinary) Account is a savings account designed for NRIs to receive income earned in India and make payments for expenses within the country.
For many NRIs, the only income they continue to earn in India is the interest credited to their NRO account. This often raises an important question: Is an NRI earning only interest income from an NRO account required to file an Income Tax Return (ITR) in India? The answer depends on the individual’s specific tax situation and may be either yes or no.
Different Types of NRI Accounts
NRIs can open the following types of bank accounts in India:
- Foreign Currency Non-Resident (FCNR) Account
- Non-Resident External (NRE) Account
- Non-Resident Ordinary (NRO) Account
The tax treatment of these accounts depends on both the type of account and the interest earned.
The first two accounts—FCNR and NRE—are exempt from tax in India. Interest earned on these accounts is not taxable while the account holder qualifies as an NRI. However, once the individual becomes a resident, the interest earned on the NRE account (after its conversion into a Resident Foreign Currency account) becomes taxable in India.
What is an NRO Account?
An NRO (Non-Resident Ordinary) Account is a bank account available to Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) residing outside India. It is primarily used to manage income earned in India, such as rent, dividends, pensions, and other receipts. Under the provisions of the Foreign Exchange Management Act (FEMA), NRIs may require an NRO Savings Account to receive such income.
The account is intended to help NRIs and PIOs conveniently manage their earnings and expenses in India. It also offers interest on deposits, periodic interest payouts, and digital banking facilities.
An NRO account is maintained in Indian Rupees (INR) and can be opened by NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs). Although remittances can be made in foreign currency or Indian Rupees, all deposits are maintained in INR. Income credited to the account may include rent, dividends, interest, and returns from investments or other assets in India.
Eligibility
Individuals who qualify as Non-Resident Indians (NRIs) under the provisions of the Foreign Exchange Management Act (FEMA) are eligible to open an NRO account.
Key Features of an NRO Account
- Deposits can be made in Indian Rupees or in foreign currency, which is converted into INR.
- Withdrawals are allowed only in Indian Rupees.
- Interest earned on the account is taxable in accordance with the applicable income tax laws in India.
Benefits of an NRO Account
Manage Income Earned in India:
An NRO account enables NRIs to receive, hold, and manage income generated in India, such as rent, salary, pension, dividends, or other earnings. It offers a secure and convenient way to handle domestic financial transactions.
Earn Interest:
Deposits maintained in an NRO account earn interest. However, the interest received is taxable in India as per the applicable tax provisions.
Investment Opportunities:
An NRO account allows NRIs to invest in various financial products, including fixed deposits, mutual funds, and other eligible investment options, helping them participate in India’s financial market.
Flexible Account Operations:
NRO accounts can be opened either individually or jointly. Joint accounts can be held with another NRI or a resident Indian, such as a close family member, providing greater convenience in managing finances.
Easy Banking Transactions:
The account supports smooth banking services, including fund transfers, utility bill payments, and other routine transactions, making financial management easier even while residing abroad.
International Fund Transfers:
Funds from an NRO account can be repatriated to the country of residence, subject to the prescribed rules and regulatory limits, making cross-border transfers possible when required.
Supports Tax Compliance:
An NRO account helps NRIs comply with Indian tax regulations on income earned in India. Banks generally deduct tax at source (TDS) on interest income, simplifying tax compliance.
Access to Additional Banking Services:
Apart from deposit management, NRO account holders can also avail themselves of various banking facilities, including loans, insurance products, and investment advisory services.
Documents Required to Open an NRO Account
- Valid passport (first page and address page)
- Valid Visa, Resident ID, or OCI card
- Overseas address proof, such as Company ID, employer’s letter, offer letter, overseas driving licence, or utility bills (the address should match the application)
- Original account statement (latest three months) of an overseas bank account or an NRE account with an Indian bank, duly attested by the bank if submitted online, or an account payee cheque of an existing NRE account with any Indian bank in the applicant’s name for a minimum amount of ₹5,000
- PAN Card
NRO vs NRE Account
| Feature | NRO Account | NRE Account |
|---|---|---|
| Purpose | Used to manage income earned in India | Used to maintain foreign income in India |
| Taxation | Interest earned is taxable in India | Interest earned is exempt from tax in India |
| Repatriation | Limited repatriation permitted | Full repatriation permitted |
| Currency | Maintained in Indian Rupees (INR) | Maintained in Indian Rupees (INR) |
Restrictions of an NRO Account
Limited Repatriation:
Funds held in an NRO account can be repatriated up to USD 1 million per financial year, subject to the applicable regulations. This limit may restrict the transfer of funds from the NRO account to the account holder’s country of residence or any other overseas destination.
Tax on Interest Income:
Interest earned on an NRO account is taxable in India as per the applicable income tax provisions. Tax is deducted at source (TDS) on the interest credited to the account under the prevailing tax laws, which may reduce the overall return earned.
Tax Compliance Requirements:
NRO account holders are required to comply with Indian tax laws, including filing income tax returns wherever applicable. This may involve additional compliance and documentation.
Is Interest Earned on an NRO Account Taxable in India?
Yes. Interest earned on an NRO account is taxable in India.
At present, TDS is deducted at the rate of 30%, along with the applicable surcharge and cess, at the time the interest is credited to the NRO deposit. Therefore, if you receive interest income from your NRO savings account, the income is treated as taxable in India, making India the source country for taxation, and you are liable to pay tax on such income.
Are There Any Income Tax Deductions Available for NRIs?
Yes, Non-Resident Indians (NRIs) can claim certain income tax deductions in India only if they opt for the old tax regime. Some deductions are available, while others cannot be claimed.
| Deductions Allowed | Deductions Not Allowed |
|---|---|
| Section 80C | Section 80C |
| • LIC Premium | • Investment in Public Provident Fund (PPF) (NRIs cannot open a new PPF account. However, an existing PPF account opened while they were residents can continue to be maintained.) |
| • Tuition Fees | • Investment in National Savings Certificate (NSC) |
| • Principal repayment of home loan | • Post Office 5-Year Deposit Scheme |
| • Unit Linked Insurance Plan (ULIP) | • Senior Citizens Savings Scheme |
| • Equity Linked Savings Scheme (ELSS) | |
| Section 80D | Section 80CCG |
| • Medical Insurance Premium | • Investment in Rajiv Gandhi Equity Savings Scheme (RGESS) |
| Section 80E | Section 80DD |
| • Interest paid on an education loan | • Deduction for maintenance, including medical treatment, of a dependent with disability as specified under the Act |
| Section 80G | Section 80DDB |
| • Eligible donations | • Deduction for medical treatment of specified diseases of a dependent, as certified by a prescribed specialist |
| Section 80TTA | Section 80U |
| • Interest earned on a savings bank account | • Deduction available to a taxpayer suffering from a disability |
For resident individuals, savings account interest is exempt up to the prescribed limit. However, for NRIs, interest credited to an NRO account is received after the deduction of TDS. As a result, an NRI whose only source of income is interest earned from an NRO account may be eligible to claim a refund of taxes for interest income up to ₹10,000.
Do NRIs Need to File Income Tax Returns for NRO Interest?
Yes, NRIs earning interest income from an NRO account are generally required to file an Income Tax Return (ITR) in India.
Interest earned on an NRO account is taxable in India and is subject to tax as per the applicable income tax provisions for the relevant financial year. Banks generally deduct TDS at around 30%, along with the applicable surcharge and cess, on the interest credited to NRO accounts. This TDS rate is higher than the rate applicable to resident individuals.
Even if TDS has already been deducted, NRIs are required to file an ITR if their total income earned in India exceeds the basic exemption limit of ₹2.5 lakh for individuals below 60 years of age under the old tax regime, or ₹4 lakh under the new tax regime.
Filing an Income Tax Return also enables NRIs to claim a refund if the TDS deducted exceeds their actual tax liability. In addition to NRO interest, if an NRI earns income from sources such as rental income, capital gains, or any other income in India, filing an ITR becomes necessary wherever applicable.
NRIs are generally required to file their return using ITR-2.
Frequently Asked Questions (FAQs)
Q1. What is an NRO account?
A Non-Resident Ordinary (NRO) Account is a bank account that allows Non-Resident Indians (NRIs) to manage income earned in India, such as rent, pension, dividends, interest, or other domestic earnings. It also enables NRIs to receive and manage funds in Indian Rupees.
Q2. Is the income credited to an NRO account taxable in India?
Yes. Income earned in India and credited to an NRO account is generally taxable in India according to the provisions of the Income Tax Act. The applicable tax depends on the nature and amount of income.
Q3. Is interest earned on an NRO account taxable?
Yes. Interest earned on an NRO account is fully taxable in India. Banks generally deduct Tax Deducted at Source (TDS) at the applicable rate before crediting the interest to the account.
Q4. What is the TDS rate on interest earned from an NRO account?
Banks generally deduct TDS at 30% plus applicable surcharge and cess on interest earned from an NRO account, unless a lower rate is available under a Double Taxation Avoidance Agreement (DTAA) and the required documents are submitted.
Q5. Can an NRI claim a lower TDS rate under DTAA?
Yes. If India has a Double Taxation Avoidance Agreement (DTAA) with your country of residence, you may be eligible for a lower TDS rate. To claim the benefit, you generally need to provide documents such as a Tax Residency Certificate (TRC), Form 10F (where applicable), and other prescribed declarations.
Q6. Can I claim a refund if excess TDS has been deducted from my NRO account?
Yes. If the TDS deducted is higher than your actual tax liability, you can claim a refund by filing your Income Tax Return (ITR) in India.
Q7. Can taxes paid in India on NRO income be claimed in my country of residence?
Yes. If your country has a DTAA with India, you may be eligible to claim a Foreign Tax Credit (FTC) for taxes paid in India, subject to the tax laws of your country of residence.
Q8. Can funds be repatriated from an NRO account?
Yes. NRIs can repatriate eligible funds from an NRO account, subject to the limits and conditions prescribed by the Reserve Bank of India (RBI). Taxes must be paid before repatriation, and documents such as Form 15CA and Form 15CB may be required in certain cases.
Q9. Is it mandatory for NRIs with an NRO account to file an Income Tax Return in India?
An NRI must file an Income Tax Return in India if they meet the prescribed filing conditions under the Income Tax Act, including exceeding the basic exemption limit or satisfying other mandatory filing criteria.
Q10. What documents are required for repatriating funds from an NRO account?
Depending on the nature and amount of the remittance, banks may require documents such as:
- Form 15CA
- Form 15CB (where applicable)
- PAN
- Repatriation request form
- Supporting documents relating to the source of funds
Q11. Can both Indian and foreign income be deposited into an NRO account?
An NRO account is primarily intended for managing income earned in India. Foreign income is generally deposited into an NRE or FCNR account, although certain foreign remittances can also be credited to an NRO account in accordance with RBI regulations.
Q12. What is the difference between an NRO account and an NRE account?
An NRO account is used to manage income earned in India, and the interest earned is taxable. An NRE (Non-Resident External) account is meant for parking foreign earnings in India, and the interest earned is generally tax-free in India, subject to the applicable conditions.
Q13. How can I avoid double taxation on income earned through an NRO account?
You can avoid double taxation by claiming benefits under the applicable Double Taxation Avoidance Agreement (DTAA) between India and your country of residence, provided you satisfy the eligibility conditions and submit the required documents.
Q14. Can a resident Indian convert a savings account into an NRO account?
Yes. When an Indian resident becomes a Non-Resident Indian (NRI), their resident savings account should generally be redesignated as an NRO account in accordance with RBI regulations.
Q15. Are joint holders allowed in an NRO account?
Yes. An NRO account can generally be held jointly with another NRI or, subject to RBI guidelines, with a resident Indian on a “former or survivor” basis or as otherwise permitted under applicable regulations.