NRE vs NRO Comparison: Tax on Interest Income of NRI Complete Guide by MyStartupSolution

Tax on Interest Income of NRI - NRE vs NRO Comparison

An NRI's money management back home in India may be one of his top priorities. Whether a person wishes to save his foreign income or manage the income generated in the country, like rent or dividends etc., one must decide rightly which type of bank account to open.

The two most popular options are NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts. They may look alike in many ways but their interest taxability in India is totally different.

At My Startup Solutions, we can help you get through Indian tax compliances that can be really daunting when you are located outside India. Talk to us for tailored solutions on your NRI investments and tax returns .

Understanding NRE and NRO Accounts

It is wise first to understand these terms before you get into the tax matter. An NRE account is mainly used to deposit your foreign income in Indian Currency (INR). The biggest attraction here is that the money is fully repatriable i.e. you are free to transfer it to your country of residence whenever you want without any limitation.

Alternatively, an NRO account is meant to keep the money which you have locally earned in India. For instance, rent from your house in India, your pension, dividend from Indian shares, etc. are included here. It is possible to bring foreign currency here as well but mainly it serves the purpose of handling Indian local earnings.

Taxation on NRE Interest Income

One of the major benefits of an NRE account is that it ranks tax free in India. By the rule of the current Income Tax Act, the interest that comes on an NRE Savings Account balance or NRE Fixed Deposit is totally free from tax in India.

The implication of this is the bank will not deduct from your account any Tax Deducted at Source (TDS) on the interest you earn. If your NRE deposit gets interest worth 1, 00, 000 in a year, you will get all the money. NRE account is undoubtedly one of the most effective means of wealth accumulation for those NRIs living in UAE or Qatar, countries which are free from income tax. However, you have to make a check of the tax system of your country first because maybe they tax the global income of the residents even if India does not.

Taxation on NRO Interest Income

The accounts mentioned above are not NRO accounts. Income in an NRO account is considered as "earned in India" and is therefore subject to the full taxation under Indian laws. The interest from your NRO Savings Account or NRO Fixed Deposit is subject to the withholding tax at the rate of 30% plus outside the cess and surcharge resulting in a rate of around 31.2%. The bank will debit the amount of tax at the account opening itself. Resident Indians have a basic exemption limit but the TDS on the NRO accounts is charged right from the first rupee of the interest. The high tax rate is something that is generally very controversial amongst NRIs but there are ways to reduce the tax burden through international treaties.

The Role of DTAA in Saving Tax

India has a double tax avoidance treaty with more than 90 countries including the USA, UK, Canada and Australia. The main objective of these agreements is to prevent an individual from being seriously taxed for the same income in two different countries.

When you are a resident of a country with which India has a double taxation avoidance agreement, you can probably negotiate a reduction in the tax deduction at source on NRO interest from 31.2% to a range of 10% to 15%. To benefit from this, you will have to submit to the bank a Tax Residency Certificate (TRC) issued by the government of the country where you currently reside together with a self declaration (Form 10F). It is really technical to handle these documents, therefore you can count on My Startup Solutions's assistance to get the right amount of your tax.

Principal Repatriability Differences 

The flip side of the coin is not only in tax but also in 'money transfer'. The principal as well as the interest amount in an NRE account can be repatriated without any limit from the side of the Reserve Bank of India (RBI).

On the respect of repatriation, NRO accounts have been given a much lesser extent. While the interest amount can be moved out smoothly post tax payment, the principal has a limit. Presently the Reserve Bank of India allows NRIs to repatriate up to USD 1 million per financial year from balances in their NRO accounts. The submitting of a Chartered Accountant's certificate (Form 15CB) along with a self declaration (Form 15CA) to prove that the due taxes were paid is part of the procedure.

Which one should you choose?

Choosing between an NRE and an NRO account solely depends on your aim with money. When your only aim is to save your foreign salary and keep it liquid and untaxed in India, NRE account is your choice without any doubt. It gives you a lot of flexibility and you pay zero tax in India.

The only exception is if you own a property in India that makes rent or if you have some old investments that pay you dividends then you have no other way but opening an NRO account. You cannot put Indian sources of income into your NRE account. Most NRIs keep both accounts in line as the best option for them is using NRE for foreign savings and NRO for managing Indian expenses and local income.

Summary of Key Differences

To make it easier for you to decide, here is a quick comparison:

Conclusion

It is of paramount importance to be very clear about the law when managing NRI funds so as not to get punished and also to get maximum returns. It is tempting to go for the NRE account because you will get the interest income totally free from tax but don't forget that NRO account is really necessary especially for those who have properties in India. One has to be sure that the bank has the correct status of the customer and also the use of the DTAA benefits is there if one has an NRO account.

Contact My Startup Solution at +91-7081220800

The tax laws in India are subject to change after every budget of the union and thus one has to comply with them in order to have a stress free financial life. If you have any questions regarding the account that would suit you best or if you are looking for help in filling Form 15CA/CB for remitting money outside, our team at My Startup Solutions is available for you at +91-7081220800, ready to serve you with expert assistance tailored to the globally Indian community.

We make complicated Indian taxation understandable so you can concentrate on your life abroad while your wealth accumulates safely back home.