NRO Account Taxation: TDS, NRO Tax Rate & Interest Taxable Guide

For many NRIs (Non-Resident Indians), managing income in India is a must. This could be from rent, dividends, or other Indian sources. To manage such income, NRIs often open a Non-Resident Ordinary (NRO) account.  

But one of the most asked questions is about the tax on NRO accounts. Many NRIs struggle to understand whether NRO interest is taxable in India, the TDS rates, and the filing requirements for their NRO accounts. 

Let us break down taxation on NRO accounts, including TDS and interest tax, and discuss how NRIs can better deal with it.  

What is an NRO Account? 

A Non-Resident Ordinary account is a bank account that lets NRIs manage their income earned in India. This includes dividends, interest, rent from property, pension, and other income. 

However, there are taxes on NRO accounts that we will understand later. 

An NRI can open an NRO account as savings, current, recurring, and fixed deposits. They can deposit both Indian and foreign earnings in NRO accounts, but funds can only be repatriated in Indian Rupees. 

Also, one can repatriate funds only to the extent of $1 million per financial year. 

Who can Open an NRO Account? 

These individuals are eligible to open an NRO account, whether a savings or fixed deposit account: 

• Non-Resident Indian (NRI)/Person of Indian Origin (PIO)/Overseas Citizen of India (OCI).
• Spouses of Indian citizens or PIOs
• Any Indian citizen who is living abroad for business purposes, education or employment. 
• Those whose parents or grandparents were citizens of India under the Constitution or the Citizenship Act of 1955.
• Individuals working with the United Nations or posted abroad by the Government of India or public sector enterprises.
• Indian nationals who are employed as mariners, serving with foreign-registered airlines or working on oil rigs.

Is the NRO Account Taxable?

Yes, income earned on an NRO account is taxable in India. Unlike NRE accounts, which are tax-free, NRO accounts come with taxes on income.

Tax on NRO accounts applies to various income types:

• Interest earned on the account balance or fixed deposit account 
• Rental income deposited into the account
• Capital gains from selling property or shares
• Dividends received from Indian companies

Interest on an NRO account taxable?   

The interest earned on an NRO savings and fixed deposit account is subject to tax, and the applicable tax is deducted from the source. The TDS on an NRO account is charged at a flat rate of 30%, along with any applicable surcharge and cess. Your bank deducts this TDS from the interest income before crediting the balance to your NRO account.

But NRIs can reduce their tax burden under the Double Taxation Avoidance Agreement (DTAA) by submitting the required documents to their bank.

An NRI earning interest income from an NRO account must also file an income tax return (ITR). Since interest earned from an NRO account is taxable in India, they must report this income and pay taxes based on the applicable income tax slabs for the relevant financial year.

How to Avoid TDS on an NRO Account? Is It Possible? 

You can’t avoid TDS on NRO account interest. The bank deducts it before crediting the interest, and it appears in your Form 26AS. But you can claim credit for the TDS by filing an income tax return in India.

If you are an NRI and want a lower NRO tax rate under the DTAA, you need to submit these documents to your bank:

• Self-attested copy of your PAN card
• Tax Residency Certificate (TRC) from your country of residence
• Form 10F (self-declaration)

Also, file your tax return in India. If your total income is below the taxable limit, you may be able to claim a full refund. This is the only legal way to reduce TDS on the NRO account.

Conclusion

Understanding NRO taxation is a must for NRIs managing Indian income. The interest on NRO accounts is taxable at 30%, and proper documentation can help reduce this tax liability. Regular filing of returns ensures you don’t pay more than necessary while staying tax-compliant.

Consult a tax expert specialising in NRI taxation for complex tax matters involving NRO TDS rates or avoiding TDS on the NRO account.

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