Non-Resident Ordinary Account (NRO): Transferring Money to Taxation Explained

All banking and investment transactions of a non-resident in India are regulated by the Foreign Exchange Management Act (FEMA). Non-Resident Indian Citizens and Persons of Indian Origin (PIO) are collectively referred to as Non-Resident Indians (NRIs). They are allowed to have three types of bank accounts in India. Non-Resident Ordinary Account (NRO), Non-Resident External Account (NRE) and Non-Resident Foreign Currency Account (FCNR) in India.

Who can open a Non Resident Ordinary (NRO) account

As soon as a person leaves India with the intention of staying out of India for an indefinite period, he becomes a non-resident under the provisions of FEMA, regardless of his physical stay in India. Once you become a non-resident, you must immediately notify your bank that you have become a non-resident. Upon receipt of this notification, the banks will designate all your existing bank accounts as an NRO account. You can also open a new NRO account after becoming a non-resident. A person who is not an NRI can also open the NRO account while visiting India for limited purposes while in India. However, a citizen of Pakistan or Bangladesh needs prior permission to open an NRO account in India.

An NRO account can be opened jointly with any resident or other NRI. All NRO accounts are denominated in rupees and can take the form of a savings account, current account, recurring account or fixed deposit account. In addition to the Indian citizen turned non-resident, a non-Indian citizen who is a Person of Indian Origin (PIO) can also open an NRO account in India. Your NRO account can also be managed by any resident holding your power of attorney.

What debits and credits are allowed on the NRO account?

Any amount transferred to India from abroad through the appropriate banking channel can be credited to the NRO account. NRI can deposit foreign currency up to $5,000, in India, duly justified by a currency declaration form. Money can also be transferred to the NRO account from the NRO account of any other NRI. All your regular Indian income like rent, dividends, pension, etc. can also be credited to your NRO account. A resident who is your close relative can also donate or lend you money in Indian rupee and the same amount can be deposited in your NRO account. Proceeds from the sale of property owned by an NRI may also be deposited into the account.

Up to $1 million can be paid out of India or transferred to your NRE account each year, subject to certain procedural compliances of the NRO account. Money from the NRO account can also be used to make regular local payments in rupees, such as land rents or taxes. This amount can also be used to make investments in India on a non-repatriation basis.

Tax Provisions and TDS on Interest on NRO Account

Although for resident Indians interest on savings bank account is taxable but there is no provision for deduction of tax at source but banks are required to deduct tax at source source on interest credited to all NRO accounts, including the NRO savings account. All individuals and HUF whether resident or non-resident are entitled to a deduction under Section 80 TTA in an amount up to Rs. 10,000/- in respect of interest on the bank account savings.

Interest on NRO fixed deposits and recurring deposit accounts managed by an NRI is taxable for residents as well as NRIs. A resident may submit form no. 15 G or 15H for non withholding tax on this income but the same facility is not accessible to a non-resident.

Transfer from NRO account to NRE account or remittance from NRO account outside India

The transfer of money from an NRO account to an NRE account is treated as an overseas funds transfer and you must follow the prescribed procedure. You must obtain an accountant’s certificate and submit it to the bank. In case the amount to be transferred represents taxable income in India, the CA is required to certify that the proper taxes in respect of the money to be transferred have been duly paid.

Balwant Jain is a tax and investment expert and can be contacted at [email protected] and @jainbalwant on Twitter.

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