Non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) can use Non-resident External (NRE) and Non-resident Ordinary (NRO) to park their income earned abroad and in India, respectively. However, the tax treatment of that income will be different. Income in an NRE account is completely tax-free in India, whereas income in an NRO account may incur a tax deducted at source (TDS) of 30% along with surcharge and education and health cess of 4%. This means that if an NRI earns the same income from their NRE and NRO accounts, the tax outgo on the NRO account can be significantly higher.
An expert projection indicates how an NRI earning 7% interest on $10,000 investment in an NRE account and a Rs 8.5 lakh investment in their NRO account may end up paying Rs 18,500 in TDS in the NRO scenario, while the income from the NRE account remains tax-free.
But what about the tax status of the income from an NRE account in the NRI’s country of residency? Can the same NRI save tax partially or fully from their NRO account income if India has a Double Taxation Avoidance Agreement (DTAA) with the country where the NRI resides?
Key differences between NRE and NRO account
| 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. |
Taxation of income from NRE and NRO accounts
Abhishek Soni, CEO & co-founder, Tax2win, told ET Wealth Online that 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.
As far as an NRO account is concerned, interest earned on an NRO account is taxable in India and is generally 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.
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Soni gives an example of how income earned from an NRO account can be taxed in India. He is calculating tax on a Rs 1 lakh interest income for a person in the 20% tax slab.
| Particulars | Amount (₹) |
| Interest Income | 1,00,000 |
| Applicable Tax Rate | 20% |
| Income Tax (20% of ₹1,00,000) | 20,000 |
| Health & Education Cess (4% of ₹20,000) | 800 |
| Total Tax Liability | 20,800 |
| Net Amount After Tax | 79,200 |
How NRIs having nearly the same income from NRE and NRO accounts may pay significantly higher TDS in NRO account
Soni explains how an NRI earning a 7% interest from their $10,000 investment in an NRE account don’t need to pay any tax in India, while the same NRI earning a 7% interest on their Rs 8.5 lakh investment in an NRO account might have to pay Rs 18,500 in TDS.
| Particulars | NRE Account | NRO Account |
| Investment Amount | ₹8,50,000 (approx. $10,000) | ₹8,50,000 (approx. $10,000) |
| Interest Rate | 7% p.a. | 7% p.a. |
| Annual Interest Earned | ₹ 59,500 | ₹ 59,500 |
| Taxability of Interest in India | Exempt from tax | Taxable in India |
| TDS / Tax Deducted | Nil | ₹18,500 (approx.) |
| Net Interest After Tax | ₹ 59,500 | ₹ 41,000 |
| Effective Tax Rate on Interest | 0% | 30%+surcharge cess |
| Repatriation Impact | Full interest retained | Interest reduced by TDS unless DTAA benefit or lower TDS certificate applies |
Let’s break it down to two points. First, will the income from an NRE account be taxed in the NRI’s country of tax residency? Second, can an NRI save on taxes, partially or fully, on their income from an NRO account if they live in a country that has a Double Taxation Avoidance Agreement (DTAA) with India?
Soni says 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.
The effective tax burden may reduce for an NRI having income from an NRO account if India has a DTAA with the country where the NRI resides, says Soni.
In such a case, an NRI can generally:
● 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.
The exact benefit depends on the DTAA between India and the country of residence.
Thus, you can see that an NRI or an OCI may not have to pay tax on their income from an NRE account in India, but they may be taxed in the country of their residence.
On the other hand, an NRI can save tax on their income from an NRO account by claiming credit for taxes paid in India in the country of residence or availing a lower DTAA tax rate if the treaty has such a provision.
Other features of NRE and NRO accounts
Shetty explains some of the other key features of NRE and NRO accounts:
Who should open an NRE account?
An NRE account is appropriate when your primary source of income is outside India and you want to maintain those funds in an account that offers full repatriability. It is particularly useful for NRIs and OCIs who regularly remit money to India for savings, investments, family support, or long-term wealth creation.
Who should open an NRO account?
An NRO account becomes necessary when you have income originating in India that needs to be received and managed locally. Common examples include rental income from property, pension receipts, dividends, interest income, or proceeds from investments and assets located in India.
Under FEMA regulations, resident savings accounts must generally be redesignated as NRO accounts once an individual becomes a non-resident. Beyond regulatory compliance, an NRO account serves as the primary banking channel for handling Indian-source income, local payments, investments, taxes, and other financial commitments within India. It is therefore an essential component of financial planning for NRIs who continue to maintain financial ties with India.
Denomination in NRE and NRO accounts
Both NRE and NRO accounts are maintained in Indian Rupees. However, the source of funds differs significantly between the two.
An NRE account is funded through foreign currency remittances, which are converted into Indian rupees at prevailing exchange rates when credited to the account. Although the account balance is maintained in rupees, it is intended for overseas earnings.
An NRO account is also maintained in Indian rupees but is primarily used to receive and manage income generated within India. Since both accounts are rupee-denominated, exchange-rate considerations arise mainly at the time of remittance into or out of the account rather than during day-to-day operations.
Repatriability and transferability in NRE and NRO accounts
NRE accounts offer full repatriability of both principal and interest. This means account holders can freely transfer funds abroad without restrictions, subject to normal banking procedures and documentation requirements. This flexibility makes NRE accounts particularly attractive for NRIs who may need access to their funds across multiple jurisdictions.
NRO accounts are subject to FEMA regulations governing repatriation. While interest income is generally repatriable, the transfer of principal is permitted subject to prescribed limits, documentation requirements, and applicable taxes. NRO accounts are therefore more suitable for managing domestic income rather than moving funds internationally. Transfers between eligible NRE, NRO, and FCNR accounts are permitted subject to RBI guidelines and bank-specific procedures.
Holding structure in NRE and NRO accounts
Both NRE and NRO accounts can be opened by eligible NRIs and OCIs, but the rules for joint ownership differ. An NRE account can generally be held jointly with another NRI or OCI. Joint holding with a resident Indian is typically permitted only on a 'former or survivor' basis, subject to RBI regulations.
NRO accounts offer greater flexibility. They can usually be opened jointly with another NRI, OCI, or a resident Indian relative, subject to applicable banking norms. This makes NRO accounts useful for individuals who continue to manage family assets, property-related income, or financial obligations in India alongside resident family members.
Deposits and withdrawals in NRE and NRO accounts
NRE accounts are primarily funded through inward remittances from abroad or transfers from other NRE and FCNR accounts. When foreign currency is deposited, it gets converted into Indian Rupees right away. Withdrawals can be made in Indian Rupees for local use, while funds can also be repatriated abroad when required.
NRO accounts are designed to receive income earned within India, including rent, pension, dividends, interest income, and other domestic receipts. They can also receive eligible inward remittances. Withdrawals are made in Indian Rupees and are commonly used for local expenses, investments, tax payments, and other financial obligations within India. The operational framework ensures that domestic income is managed in accordance with FEMA regulations.
