NRE vs NRO Taxation: NRI Tax Exemptions, TDS Rates, and DTAA

Taxation of NRE and NRO accounts are different in terms of interest taxation, corresponding TDS implications, and transfer of funds outside India. While NRE accounts are more compliance friendly for non-residents, NRO accounts aid them to park their Indian income with better ease. 

What are NRE Accounts?

Non-Resident External accounts are predominantly maintained by non-residents who need to transfer funds in and out of India frequently, and those who have earnings from abroad. The money deposited into the NRE account is automatically converted into rupees,  and on withdrawal, you can convert the money into foreign currency and transfer it to any account maintained outside India.

What are NRO Accounts?

Non-Resident Ordinary accounts are also maintained by non- residents, but the primary purpose of the account is to park the income earned within India. It is very usual that NRIs have rental properties situated in India or maintain other stable income streams in India. Such income is usually deposited in an NRO account.

Predominantly, we discuss about interest taxation and procedures for repatriation of funds in this blog. Wherever required, additional information and compliance points are also discussed.

Tax Treatment of NRE Accounts 

Interest taxation

• Interest earned from funds maintained in an NRE account is tax-free in India. 
• To encourage NRIs to repatriate their foreign income to India, thereby increasing the forex reserves and rupee value, interest income from NRE accounts is made exempt.

Repatriation

• When the funds are repatriated from an NRE account to an overseas account, Form 15CA and 15CB requirements do not apply. 
• Since the NRE account usually holds income from abroad, which is not taxable for a non-resident.

TDS implications

• TDS is also not attracted under section 195 of the Income Tax Act, 1961, as the bank balance of an NRE account does not contain any income earned in India.

Tax Treatment of NRO Accounts

Interest taxation

• Though you can deposit your foreign money in NRO account, this account is primarily for the purpose of holding your Indian earnings.
• Therefore, interest earned from NRO bank balance is taxable in India under applicable slab rates.

Repatriation

• You can transfer your NRO account balance to your
  • NRE account (or)
  • Overseas account.
• For both of such transfers, you need to comply with form 15CA and 15CB requirements. 
• Rule 37BB of the Income tax Rules, 1962 and section 195  of the Income Tax Act, 1961 deals with Form 15CA and 15CB requirements. 
• They do not mandate self-transfers from NRO to NRE or overseas account for TDS or Form 15CA and CB requirements.
• However, when you transfer funds from NRO to NRE or overseas accounts, banks require Form 15CA and 15CB as a healthy practice.
• It is recommended to contact your bank to know about Form 15CA and CB requirements for funds transfer from your NRO account.

TDS Requirements

• Outward remittance from an NRO account attracts TDS requirements under section 195, other provisions of the act.
• However, for self transfers, TDS deductions are not required. Therefore, funds transfer from your NRO account to your NRE or external bank accounts do not attract TDS requirements. 
• For NRO interest income attracts TDS implications as it is taxable, under section 195 of the act.

How to reduce NRO Tax: The DTAA Advantage

• Since a non-resident’s Indian income is taxable, interest from NRO account is taxed in India as per applicable slab rates. 
• However, the same income may be taxable in the country of their residence, depending on the tax laws of that country. 
• In these situations, to avoid double taxation, you can claim benefits available in DTAA to reduce the tax implications.
• You can claim the double tax paid as credit in other country, or avail exemption in the other country.
• Documents like Tax Residency Certificate, Form 10F, and other details are required to claim DTAA benefits against NRO interest.
• DTAA will anyway not be relevant to NRE interest as it is not taxable in India.

NRE v/s NRO Taxation - Comparison Table

The following table summarizes tax implications and compliance requirements of NRE and NRO bank balance and interest:

Final Word

Tax implications and compliance are different for non-residents, in many cases. With proper awareness and accurate compliance, non-residents can avoid the consequences of non-compliance or additional tax burden.