Income Tax Return for Interest Earned in NRO Account – All You Need to Know| North Loop Official Blog
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24 Jul 2020

Income Tax Return for Interest Earned in NRO Account – All You Need to Know

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If you are an NRI who has opened an NRO account with an Indian bank, it is natural to be confused about the tax implications of an NRO account and the correct method of filing your income tax return. That is the reason we have created this guideline to answer all your questions.

Let us begin by understanding the feature of an NRO bank account –

Non-resident Ordinary (NRO) Account- This is an account that helps you to keep your earnings from India in Indian Rupees. However, the interest earned in NRO bank accounts is subject to TDS (Tax Deductible at Source). The purpose of this account is to hold earnings from India in Indian currency.
Profile image2: Let us begin by understanding the feature of an NRO bank account –
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Tax status of NRO bank account –

If you are an NRI, you must file your return of income in India if your gross-total income received in India exceeds Rs. 2.5 lakh for any given financial year. The due date for filing return is 31st July of the assessment year.
Interest income from a Non-Resident Ordinary Rupee Accountis fully taxable in India. The tax must get paid according to the income tax slab you fall under and the interest income received has to be reported under the head ‘income from other sources’.

Here are the steps you should follow to file your income-tax return successfully –

  • Determining your residential status – It is imperative to be sure of your residential status before filing your income tax return, and that can be ascertained by looking at the provisions of the Income Tax Act, 1961. Under Section 6 of the Act, you are deemed to be a Non-Resident Indian, and NRI tax laws will apply to you if -
    You do not stay in India for at least 182 days in the previous year
    You do not stay in India for 60 days or more during the previous year and 365 days or more during the four years immediately preceding the previous year.
    Also, as per the new section 6(1) of the Income Tax Act, 1961 introduced by the Finance Act, 2020, you will be considered a Non-Resident Indian if your total income (other than income from foreign sources) does not exceed Rs.15 lakh during the previous year.
  • Calculate your taxable income – If you earn interest from deposits in your NRO account, the principal, as well as the interest, are both subjected to tax deductions at a flat rate of 30%. An NRO account gets taxed at 30% of the total income accrued in India, and additionally, a cess at 3% applies to the overall tax liability. The tax that is deducted by the bank on your interest income is reflected in Form 26AS and can be included in your tax return. Also, under Section 80TTA of the Income Tax Act, 1961, you can claim a deduction and get tax benefit against the income earned from interest on your NRO saving account up-to a maximum limit of Rs.10,000.
  • Claim double taxation treaty benefit: If you are receiving interest income from your NRO savings bank account (taxable income), India becomes a source state, and you are liable to pay tax here. Moreover, the country in which you currently reside also has a right to tax such income as it is the residence state which can lead to double taxation on the same income. That is where the DTAA or Double Tax Avoidance Agreement comes into the picture. India has signed a comprehensive DTAA with several countries like USA, UAE, UK, Singapore, and others and with this treaty you can eliminate double taxation on your interest income by claiming credit for foreign taxes paid while filing your return of income in India. As per DTAA, an income may either be tax exempted in one country or taxed at a lower rate in the home country.
  • Submit and verify IT returns: If you have interest income from your NRO bank account, you have to file your return of income in ITR-2. In case you have opted for the presumptive taxation scheme, the return has to be filed in ITR-3 only. After uploading your return, you must verify it within 120 days. Failure to do so can lead to an invalid return (as if a return was never filed). Verification can be done both physically by sending ITR V (acknowledgement form) to the Income Tax CPC in Bengaluru or online through e-verification facilities.

The above information is for general purposes only. We highly recommend speaking with a certified tax advisor or chartered accountant!

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.