NRE account vs NRO account: How interest income is treated under income tax laws
My son went to US last month to take up an employment and thus has become a non-resident under FEMA. Does he have to open an NRE account? How an NRO account is different from an NRE account?
Answer: Once an Indian resident becomes a non-resident under the provisions of FEMA, he has to intimate his bank about change of his residential status. The banks then re-designates all the existing bank accounts as NRO accounts. Generally, there are no restrictions in respect of the money which can be deposited in your NRO account. You can also open a new NRO account after becoming a Non Resident under FEMA. Up to 1 USD million can be remitted every financial year from your NRO account, after paying applicable taxes in India.
An NRE account is an account which a person can open after becoming a non-resident under FEMA. NRE account can be maintained in either Indian currency or in any permitted foreign currency. There are restrictions about the money which can be credited in an NRE account. Generally, money remitted, through banking channel, from outside India can only be credited in an NRE account. Money in NRE account is fully repatriable outside India. An NRE account is virtually a bank account maintained outside India though actually maintained with Indian banks.
As far as taxation is concerned, interest earned on an NRE account is fully exempt under Section 10. However, interest credited on NRO account is fully taxable in India and the banks are required to deduct tax at source on the interest credited on all NRO bank account including a saving bank account.
Balwant Jain is a tax and investment expert and can be reached on [email protected] gmail.com and @jainbalwant on Twitter
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