All You Need to Know: NRE and NRO Accounts Taxation

For non-resident Indians (NRIs), a non-resident external (NRE) account and a non-resident ordinary (NRO) account help in the easy management of finances. NRE and NRO accounts aid in transferring, saving, and retaining income in India in Indian currency.

That said, NRE and NRO accounts differ on several fronts, one of which is taxation. The income earned on these accounts has a different tax treatment. Understanding the taxation aspect can help you better manage these accounts.

Read on to find out the applicable NRE and NRO account tax rates.

What are NRE and NRO accounts?

Before understanding the taxation aspect, let's briefly understand these accounts and their differences. NRE accounts is an account opened in India where you can park your foreign funds/ earnings in INR.. In other words, when you deposit money into an NRE account, it gets converted into Indian currency.

On the other hand, you can use an NRO account to manage income earned in India in the form of dividends, pensions, rentals, etc. This account helps you deposit earnings made domestically in India. The table below will help you understand the differences between these two accounts on some key parameters.

Parameters	NRE account	NRO account
Withdrawals and deposits	You can make deposits in a foreign currency and withdraw in Indian currency	You can make deposits in Indian as well as in foreign currency and withdraw in Indian currency
Fund transfer	You can transfer funds from an NRE account to another NRE account, NRO and to resident savings account as well	You can transfer funds from an NRO account to another NRO account & resident savings account. NRO to NRE transfer is permitted within the overall remittance limit of upto 1 Million USD subject to payment of taxes and documentation
Effect of exchange rate fluctuation	Highly susceptible to fluctuation in the value of the rupee against the foreign currency	There are no such risks associated with an NRO account

Now that you know the basic differences between NRE and NRO accounts, let's understand the taxation aspect of these accounts.

NRE account taxation

An NRE account is exempt from taxation in India; the interest income from this account is entirely tax-free in India under section 10 (4) (ii) of the Income Tax Act. Any amount of interest that you earn on your NRE account is tax-exempt in India, and the bank will not deduct any tax deducted at source (TDS).

The tax benefits on an NRE account can help you make significant savings in the long run. That said, if you return to India and become a resident, you need to convert your NRE account into a regular savings account, and the tax benefits will no longer be applicable.

NRO account taxation

While the interest income on an NRE account is exempt from taxes in India for an NRI, the case is different regarding an NRO account. The interest earned is fully taxable. A TDS of 30% is applicable on the interest earned along with surcharge and cess, irrespective of the amount you earn. You can get information about the TDS on your Form 26AS.

That said, if you are a citizen of a country with which India has a Double Taxation Avoidance Agreement (DTAA), you need to pay taxes as per the DTAA terms. The TDS rate applicable under DTAA generally ranges between 10-15% depending on the country of residence.

In case your total income in India is under the taxable limit, you can claim any excess tax deducted by filing tax return.

Get access to NRE and NRO accounts with IDFC FIRST Bank

IDFC FIRST Bank offers a range of NRI banking services through its NRI Savings Account. The offerings include an NRE Savings Account, NRO Savings Account, and a Seafarer Savings Account. You can choose the account you need and manage your funds in India hassle-free.