All You Need To Know About Nre And Nro Accounts And Taxation In India

All You Need to Know About NRE and NRO Accounts and Taxation in India

India has the largest diaspora population in the world with more than 16 million people living outside the country. Being a Non-Resident Indian(NRI), the income earned by you outside India is exempted from tax. However, is the interest accrued from such income taxable in India?

Read on further to know more about a Non-Resident External (NRE) and Non-Resident Ordinary account and taxations in India.

What Is a Non-Resident External (NRE) Account?

An NRE account is a savings account opened by an NRI to park his/her income earned outside India. The principle and the interest earned from it are freely repatriable in this account. A joint NRE account can be opened by 2 NRIs.
 
What is a Non-Resident Ordinary (NRO) Account?

An NRO account is a savings account opened by an NRI to maintain his/her income earned in India through dividend, rent, pension, etc. The free reparability is restricted to certain limits in this account. You can open a joint account one being an NRI and another Indian resident or two NRIs.

Is Interest earned on NRE and NRO Accounts Exempt from Income Tax?

As long as your status is Non-Resident Indian, the interests earned on NRE accounts are fully exempted from tax in India. Similarly, interest accrued from the deposit in Foreign Currency Non-Resident (FCNR) account is also exempted from taxation.

The interest earned on NRO account is fully taxable at 30% according to the Income Tax Act 1961 as the income is made in India through various investments. You can get the deduction of up to INR 10,000 while filing the income tax return. However, interest earned from specific mutual funds is tax-free.

You will be requested to change your NRE account to resident account upon the change in your residential status. After becoming an Indian resident, you will be asked to disclose your assets held in abroad in India and your income will be taxed.
 
Deposits and Withdrawals

Under an NRE account, individuals can deposit in foreign currency and make withdrawals in Indian currency. Under NRO account, individuals can deposit in both Indian and foreign currencies and withdraw in Indian currency.

Maintaining a monthly average balance in both the accounts varies from banks to banks with a minimum being INR 10,000.

Summary

You can choose NRE account and get tax benefits if your income is earned only outside India. If you are an NRI and you make a considerable income in India and want to manage it within India, you can opt for an NRO account.