An NRO account allows Non-Resident Indians (NRIs) to manage income earned in India, including rent, dividends, and pensions, while residing overseas. It facilitates the processing of rupee-based profits under Indian rules.
Understanding the NRO account tax consequences assures compliance and helps with financial planning since it differs from NRE accounts. This article explains everything you need to know about NRO accounts, tax in NRO accounts, and how these tax rules enable NRIs to maximise returns and avoid fines under Indian law.
Also, read How to Open Trading and Demat Accounts for NRI here.
Key Takeaways
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NRIs use NRO accounts for managing their money generated in India.
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Interest income is taxable, and TDS is deducted at the source.
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Repatriation from NRO accounts is limited to USD 1 million per year. But only after paying applicable taxes and providing documentation.
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DTAA can assist eligible residents to reduce their tax bills, but only if they file the TRC, Form 10F, and a No-PE declaration.
Also, check out Importance of NRO and NRE Accounts here
What is an NRO Account?
An NRO Account is a non-resident ordinary bank account used for keeping and managing funds originated in India after an individual becomes an NRI. NRO accounts operate in Indian rupees and accept credits such as rental income, company earnings, interest payouts, insurance proceeds, and other domestic inflows. It can be opened by NRIs, OCIs, and PIOs, which also allows for joint ownership with local Indians for ease of operation.
Banks provide NRO savings and term deposit options, both subject to FEMA restrictions. The account facilitates regular payments, tax compliance, and regulated repatriation of qualifying monies, making it critical for managing Indian-sourced revenue efficiently.
Also, check out Types of Demat Account here.
Benefits of NRO Account
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Safe Management of Indian Income: NRIs can deposit different India-sourced incomes, such as rental income, dividends, pensions, or other inflows, in an NRO account, guaranteeing that their domestic funds remain protected with NRO account tax rules.
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Flexible Deposit Options: NRO accounts offer savings, current, fixed, and recurring deposit options, allowing NRIs to select the product most suited to their domestic cash flows.
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Joint Holding Facility: The account can be owned jointly with another NRI or a native Indian, allowing families to better manage their Indian income and financial commitments.
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Loan Against Deposits: NRIs can get loans or credit lines against their NRO fixed deposits, sometimes at lower interest rates because the FD serves as security.
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Repatriation Possibility: Current income (such as interest) and certain credits can be repatriated, while capital repatriation from NRO is permitted up to USD 1 million each fiscal year, subject to verification.
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Regulatory Compliant: NRO accounts are subject to FEMA laws, and their structure provides straightforward reporting of domestic revenue, allowing NRIs to remain compliant with applicable Indian requirements.
Also, check out Demat Account for NRI here.
Restrictions of NRO Account
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Currency constraints: Deposits into an NRO account must be in Indian rupees; foreign currency may be credited, but it is promptly converted to INR.
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Repatriation Limits: The repatriation of monies (principal and income) from NRO accounts is limited to USD 1 million each fiscal year, subject to verification and tax compliance.
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Transfer Restrictions for NRE: Money credited to an NRO account cannot be transferred back to an NRE account without passing stringent regulatory requirements.
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Tax Liability: Interest earned from an NRO account is completely taxed in India. Banks apply TDS (Tax Deducted at Source) at a flat rate. Thus, tax in NRO accounts is an important factor.
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FEMA and Regulatory Compliance: All transactions must adhere to the FEMA (Foreign Exchange Management Act) standards. Failure to follow repatriation documentation or transfer rules may result in regulatory attention or fines.
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Loan Usage Limitations: While NRIs can obtain loans on NRO accounts, these loans are only valid for usage in India. Re-lending or foreign currency loans secured by NRO funds are not authorised.
Tax Implications on NRO Account
The following are the primary tax implications for an NRO account:
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TDS on Interest Income: NRO account tax rules mandate TDS at 30% TDS, plus any relevant surcharges and cess. Larger interest income, such as ₹50 lakh, might result in higher surcharges and a higher effective rate.
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Exemption under Section 80TTA: NRIs can claim up to ₹10,000 tax in NRO account per year for interest generated from NRO savings accounts (not FDs) under Section 80TTA. This marginally reduces the taxable share of interest income, but the overall tax burden remains substantial.
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Benefits of the Double Taxation Avoidance Agreement (DTAA): NRIs from countries having DTAA treaties can get a lower TDS rate, often between 10-15%, rather than the regular 30%. To claim this, they must provide a Tax Residency Certificate (TRC), Form 10F, and a declaration (e.g., no Permanent Establishment in India).
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Principal Amount and Repatriation: The primary balance in an NRO account is normally not taxed while it is stored there. Repatriation of income (e.g., rent, interest) is permitted after tax compliance; capital repatriation (principal) is limited to USD 1 million each fiscal year, subject to paperwork and tax filing.
Interest Income Taxation
Interest on NRO savings or term deposits is subject to 30% TDS, plus any applicable cess and surcharge. This results in a much higher tax in NRO accounts compared to resident accounts.
The cess adds 4% to the TDS amount, whereas the surcharge fluctuates according to the individual's total taxable income for the year. When total income is less than ₹50 lakh, there is no surcharge.
However, if income exceeds that level, the surcharge starts at 5% and increases to 37% for higher slabs, significantly raising the effective TDS rate. The tax is deducted before the interest is deposited into the NRO account, which means the net amount that NRIs receive is already post-tax.
If an NRI earns ₹40 lakh interest in a year, the bank will collect TDS at an effective rate of 31.2% (30% + 4% cess). This results in a TDS deduction of about ₹12.48 lakh, followed by a ₹27.52 lakh credit to the account. The deduction is final unless the NRI files an Indian tax return and requests a refund, as no surcharge applies below ₹50 lakh.
Exemptions and DTAA
NRIs can reduce their overall tax liability in NRO accounts by taking advantage of additional exemptions and treaty-based reliefs. Section 80TTA of the Income Tax Act, 1961, allows individuals and HUFs, including NRIs, to deduct up to ₹10,000 on interest generated from NRO savings accounts. This deduction does not apply to interest from NRO fixed deposits, recurring deposits, or any other investment-related interest. It can only be claimed under the old tax regime, as 80TTA is not allowed in the present regime.
A significant tax-relief mechanism for NRIs is the DTAA, which prevents the same income from being taxed twice. Interest earned on an NRO account may be subject to a lower treaty rate under DTAA, which varies depending on the country. NRO interest tax is capped at 10% to 15% under many treaties. However, the precise amount depends on the particular DTAA between India and the NRI's home country.
To get DTAA benefits, NRIs must submit specific documents to the bank each fiscal year. Documents include a valid Tax Residency Certificate (TRC), Form 10F, and a No Permanent Establishment statement. The DTAA assures equitable tax treatment in NRO accounts, particularly for nations with set treaty rates.
Principal and Repatriation
The principal in an NRO account is taxed only if it reflects unreported income. Under NRO account tax laws, funds up to USD 1 million per year can be repatriated following tax clearance consisting of both capital and income, provided that all taxes are paid and the necessary documents, such as Form 15CA/CB, are submitted.
Interest earnings are taxable before repatriation; therefore, NRO account tax requirements must be met first. Once compliance has been met, funds can be sent internationally without further limitations.
Also, check out Income Tax for NRI here.
Documents Required for NRO Account
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A valid passport (self-attested copy) is required to confirm identification.
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To prove non-resident status, provide a valid visa, work permit, or residency permit (or OCI/PIO card).
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PAN card (or Form 60 if no PAN is assigned) for tax identification.
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A recent utility bill, bank statement, or employer letter might be used as confirmation of an overseas residence.
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If applicable, provide evidence of Indian address (passport, Aadhaar, driver's license, or other valid ID).
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Two current passport-size pictures.
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FATCA declaration (tax compliance) as part of KYC.
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When applying from overseas, copies must be authenticated by a notary, an Indian consulate, or a bank official.
How to Manage NRO Tax Efficiently?
Efficient management of tax in NRO account involves understanding how interest income is taxed and planning your financial activities to avoid excessive deductions. Key strategies include:
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Use DTAA advantages by filing a TRC, Form 10F, and a no-PE declaration to decrease NRO tax from 30% TDS to the relevant treaty rate.
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To better manage taxable interest, plan NRO fixed deposits with staggered maturities or select appropriate FD kinds.
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Consolidate all Indian income (rent, dividends, and pension) into a single NRO account to facilitate tax tracking and reporting.
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File an annual ITR to claim reimbursements for excess TDS and maintain compliance with Indian tax laws.
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Maintain up-to-date KYC and tax paperwork with your bank to prevent greater default TDS deductions.
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Every year, review your residential status to understand how tax regulations apply and change your financial strategy accordingly.
Also, learn What is Double Taxation here.
Conclusion
An NRO account is required for processing revenue earned in India; however, it is subject to certain tax requirements, TDS deductions, and repatriation restrictions that must be strictly observed. Thus, understanding how tax in NRO account works enables NRIs to handle their Indian revenues with transparency and compliance,
Using DTAA advantages, keeping correct paperwork, and completing yearly tax returns can considerably avoid excessive tax payments. NRIs may better manage their NRO accounts by planning deposits, managing income, and staying up to speed on regulatory requirements.
