How Deposits in NRO Accounts Are Taxed and Repatriated?

NRO accounts refer to the default accounts left with NRIs or Non-Resident Indians upon leaving the country.

When a resident person becomes a non-resident (NRI) as per the FEMA (Foreign Exchange Management Act), his/her resident savings account is re-designated. The account is now converted into what we call an NRO account, or a Non-Resident Ordinary account.

Why are NRO Accounts Preferred by NRIs?

NRO accounts offer less amount of restrictions for the account holders. They form a preferred choice by levying lower restrictions on the movement of Indian rupee, especially when compared to other types of accounts. This makes NRO better than the other accounts available to NRIs in India.

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NRO Accounts: The Purpose

These accounts have been created to support the NRIs. They have been specially designed to allow smoother banking facilities and transactions for them. The individuals can deposit their earnings from various sources like dividends, rental income and interest.

In fact, there are many credits that cannot be transferred to the NREs or Non-Resident External accounts. So, they are first credited to none other than the NRO accounts only.

There are various other benefits of the newly introduced account type. It plays a pivotal role in managing tax obligations. It lets the users pay taxes on their Indian income without carrying out any additional paperwork. To add to it, the NRIs also receive tax refunds seamlessly.

NRO or Non-Resident Ordinary accounts, designated to NRIs, provide a mechanism to repatriate funds to the overseas account within permissible limits.

How Deposits in NRO Accounts Are Taxed: NRO Account Taxation

The Income-tax Act, 1961 (ITA) is the main body that governs the tax treatment of income in an NRO account. Non-residents are taxed only on the income that they earned or received within India. While the tax rates for non-residents generally align with those for residents, there are specific provisions for income where non-residents may face different tax rates. These include interest, dividend and long-term capital gains on immovable property.

The NRIs can also gain profit from the Double Taxation Avoidance Agreement (DTAA). This is when India has an agreement with their country of residence.

What is DTAA? It's a scheme signed by India with 90 countries, as per which you can claim tax credits while filing taxes in your country of residence by implementing just a few simple steps. The DTAA helps in preventing double taxation. It does so by ensuring that income is not taxed in both India and the non-resident's home country. Based on the terms of the DTAA, income earned by NRIs may be taxed at a reduced rate in India. It may even be exempt from tax in India.

Other Information on NRO Account-Related Taxation

Here are a few examples where tax is applicable pertaining to the NRO account for NRIs:

• Capital gains levied on investments in India
• Consulting fees or salary earned in India
• Rent from property owned in India
• Interest income earned from your NRO account or deposits.

You need to be aware that for all the earnings received in your account, no matter whether you work in India or overseas, your NRO Account tax implication will come in place. The earning received through one's NRO account is taxable at 30% plus applicable surcharge and cess.

Being an NRI, you can earn tax credits for tax paid in India which is against your tax liability in the country you reside in.

However, in order to avail these benefits, you need to submit a few documents, including the following:

• Tax residency certificate issued by your country of residence.
• Self-declaration format to your chartered account for the deduction of the tax at source in India.

How Deposits in NRO Accounts Are Repatriated?

What is Repatriation for NRIs?

It is the transfer of funds from an Indian bank account to a foreign bank account after conversion into foreign currency. For NRIs, repatriation is about moving money from Indian bank accounts (like NRE, NRO, or FCNR accounts) to their accounts in their country of residence. There are two main types of accounts used for repatriation. These are the NRO (Non-Resident Ordinary) account and the NRE (Non-Resident External) account. While the funds are fully repatriable f or NRE Accounts, such is not the case for NRO Accounts.

FEMA Repatriation Rules for NRO Accounts

The Reserve Bank of India (RBI) governs the repatriating of funds from an NRO account to an overseas account under the guidelines of FEMA.

As per FEMA mandate, NRO Account holders can fully repatriate only the interest amount. The repatriation limit for the principal amount is limited to USD 1 million per financial year. Also, the interest earned on NRO Account is subject to TDS (Tax Deducted at Source). For now, the interest earned via NRO Account is taxed at 30% - additional cess is levied.

More on NRO Account Repatriation

The current income like rent, dividend, interest, etc., can be repatriated without any limits. Additionally, all tax liabilities related to the income need to be settled before repatriation.

To initiate the repatriation, various formalities and documentation are required. Form A2 must be completed, carrying information such as the amount being remitted, the purpose of the transfer, and the recipient's bank details. Banks also require you to submit Form 15CA along with Form A2. This is needed even if the transfer is being made to the NRI's own overseas account.

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