NRE vs NRO income tax rules: How these NRIs, OCIs can save up to Rs 20,500 on $10,000 FD investment

Picture this: you invest $10,000 in a Non-Resident External (NRE) and Rs 9,40,000 (which is also $10,000) in a Non-Resident Ordinary (NRO) fixed deposit (FD) account, both earning the same interest rate. You could save around Rs 20,500 in taxes in India from the earnings on your NRE FD. The different tax treatment of income from NRE and NRO accounts can really help Non-resident Indians (NRIs), Overseas Citizen of India (OCI) and Persons of Indian Origin (PIOs) by allowing them to save a good chunk on taxes from their NRE deposit interest, since that income is tax-exempt. In contrast , interest earned on NRO investments is taxable in India and subject to up to 30% tax deducted at source (TDS). But can NRE account holders save this tax in all situations?

An expert analysis reveals that an NRI with both NRE and NRO accounts can save a significant amount on taxed on their NRE FD investments in India even when they invest the same amount in both NRE and NRO FDs.

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The investment in the NRE FD is $10,000, while the investment in the NRO FD is Rs 9.40 lakh (equal to $10,000, assuming $1= Rs 94). The interest rate in each case is 7%. Calculations show tax liability in the form of TDS when deducted at 20% and 30% rates, respectively. The calculations also include a 4% health and education cess on income tax.

Particulars	NRE Account (USD)	NRO Account Fixed Deposit (30% Tax + 4% Cess)
Initial Investment	$10,000	₹ 9,40,000
Annual Interest Rate	7%	7%
Gross Interest Earned (1 Year)	$700	₹ 65,800
Tax Rate in India	0% (Exempt)	31.2% (30% base rate + 4% cess)
Tax Treatment	Fully exempt under Section 10(4) of the Income Tax Act	Taxable in India
Tax Deducted (TDS)	$0	₹ 20,529.60
Net Interest Earned	$700	₹45,270.40 (≈ $481.6)
Exchange Rate Assumed	$1 = ₹94	$1 = ₹94

Source: Vivek Vardhan, regional director, Anand Rathi Share and Stock Brokers

Treatment of TDS in NRO account

In the calculations above you can see that the investor can save Rs 20,529 in tax on NRE deposits when TDS is 30% on NRO deposits. While a bank may cut TDS as per tax slabs, there may be cases when the bank deducts a flat 30% TDS on NRO investments.

Abhishek Soni, CEO & co-founder, Tax2win, says interest earned on an NRO account, such as FD, savings account and a recurring deposit (RD), is generally subject to TDS at 30% (plus applicable surcharge and cess), irrespective of the investor's tax slab.

However, TDS may not always be subject to a flat 30% as it depends on the type of income credited to the NRO account, explains Soni.

“Other types of income such as capital gains, dividends, or rent, may be subject to different TDS rates and tax provisions. The investor's final tax liability is determined separately while filing the Income Tax Return (ITR), and any excess TDS deducted can be claimed as a refund,” says Soni.

Tax treatment of income from NRE account in India

Soni says that the interest earned on an NRE savings account, fixed deposit, or recurring deposit is exempt from income tax in India as long as the account holder qualifies as a non-resident under FEMA and is allowed to maintain the account. No TDS is deducted by the bank.


Tax treatment of NRO accounts

According to Soni, interest earned on an NRO account is taxable in India and is subject to TDS by the bank.

“It is taxed at the applicable income tax slab rates. However, banks usually deduct TDS at a higher prescribed rate upfront, and the NRI can claim a refund or pay additional tax while filing the return,” says Soni.

Can income from NRE account be taxed outside India?

Soni reveals that the income from an NRE account may not be completely tax-free when an NRI moves it from India to their country of tax residence.

An NRI may be taxed on the interest earned on an NRE account in their country of tax residence. This is because many countries like the US, UK, Canada, and Australia tax their residents on their worldwide income, says Soni.

Key differences between NRE and NRO accounts

Aspect	NRE (Non-Resident External) Account	NRO (Non-Resident Ordinary) Account
Definition	Designed for NRIs and OCIs to hold and manage income earned outside India.	Designed for NRIs and OCIs to manage income generated within India.
Purpose	To transfer overseas earnings to India while retaining the ability to repatriate funds abroad.	To receive and manage Indian-source income after becoming a non-resident under FEMA regulations.
Source of Funds	Foreign salary, overseas business income, foreign investments, and savings accumulated abroad.	Rental income, pension, dividends, interest income, and proceeds from investments or assets in India.
Primary Use	Holding and managing foreign earnings in India.	Managing income and receipts arising in India.
Repatriation	Funds can be repatriated overseas when required.	Primarily used for Indian income; subject to applicable FEMA and tax regulations for repatriation.
Typical Account Holders	NRIs and Overseas Citizens of India (OCIs) with foreign income.	NRIs and OCIs who earn income from Indian sources.
Regulatory Requirement	Suitable for routing overseas earnings into India.	Indian-source income should generally be routed through an NRO account once an individual becomes a non-resident under FEMA regulations.

Source: (Adhil Shetty, CEO, Bankbazaar)

Can NRIs, OCIs reduce tax on their income from NRO accounts?

Soni says the effective tax burden may be reduced for an NRI having income from their NRO account if India has a Double Taxation Avoidance Agreement (DTAA) with the country where they reside.

Soni says that in such a case, an NRI has the following options:

● Claim credit for taxes paid in India in the country of residence, or

● Avail a lower DTAA tax rate if the treaty provides one and the required documents (such as tax residency certificate) are submitted.

For example:

An NRI residing in the UK earns Rs 1,00,000 in NRO interest.

● Tax paid in India = Rs 20,800 (example above)

● If UK tax law taxes the same income, the NRI can generally claim credit for the Indian tax already paid, avoiding double taxation.

Thus, income from an NRE account is exempt from tax in India, but an NRI may need to pay tax on it if they move it from India to the country of their residence.

Similarly, income from an NRO account is taxed at slab rates in India, but NRIs can save tax on it by claiming credit for taxes paid in India in the country of their residence or availing a lower DTAA tax rate if the treaty allows it.

An NRE account also provides the benefit of currency appreciation if the price of a foreign currency increases against the Indian rupee during the tenure of the deposit. There is no such advantage in an NRO account since an investor invests and withdraws in Indian rupees. So, before investing in an NRE or an NRO account, it is important to consider tax liabilities and see where you can save more tax and earn more.