How Can I lower the Taxes Payable on My NRO Account ?
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NRIs operating an NRO account in India are usually concerned with high TDS rates; here’s a look at how you can reduce your tax burden.
Non-Resident Ordinary (NRO) accounts are maintained by Non-Resident Indians (NRIs) to hold their income accrued or arising from India. This can be in the form of rental income, dividend income from stock market investments, pension income, etc.
The funds in this type of account are maintained in Indian rupees. And since this account holds your India-based earnings, it also attracts taxes.
How is NRO Account Taxed?
As per the current income tax laws, both the principal as well as the interest earned in an NRO account are fully taxable in India(1), subject to tax deduction at source (TDS).
Interest income from an NRO account is taxed at the rate of 30% along with applicable cess and surcharge, according to the Income Tax Act of 1961.
However, in case you are a resident of any of those countries with whom India has entered into the Double Taxation Avoidance Agreement (DTAA), the tax will be deducted as per the DTAA agreed between India and the respective country.
Under the DTAA facility, the TDS rate applicable is generally in the range of 10-15% as per the country of residence based on the prevailing agreement time.
To avail the facility, you have to provide the tax residency certificate(2) of your resident country along with a self-declaration as per the bank format.
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What are the TDS Rates Applicable for NRO Account?
Any interest paid/accrued in an NRO account, either on savings or fixed deposits, will be subject to a flat TDS rate (3) of 30% along with a surcharge and a health and education cess of 4%. Notably, the surcharge applicable increases with the increase in the interest income as mentioned below:
- If the total interest earned on NRO deposits and savings bank accounts is less than or equal to Rs 50 lakh, then the tax rate is 31.2% (TDS @ 30% + surcharge 0% + cess 4%)
- If the total interest earned is greater than Rs 50 lakh and less than or equal to Rs 1 crore, then the tax rate is 31.2% (TDS @ 30% + surcharge 10% + cess 4%)
- If the total interest earned is greater than Rs 1 crore and less than or equal to Rs 2 crore, then the tax rate is 35.88% (tax rate @ 30% + surcharge 15% + cess 4%)
- If the total interest earned is greater than Rs 2 crore and less than or equal to Rs 5 crore, then the tax rate is 39% (tax rate @ 30% + surcharge 25% + cess 4%)
- If the total interest earned exceeds Rs 5 crore, then the tax rate is 42.74% (tax rate @ 30% + surcharge 37% + cess 4%)
Can TDS payment be avoided on NRO accounts?
The deduction of TDS from the interest earned on the NRO account cannot be avoided.
However, NRIs are eligible to receive a tax deduction on interest income of up to Rs 10,000 on a savings account during a financial year under Section 80TTA of the Income Tax Act, 1961.
This means that if your total interest income earned during a financial year from one or more NRO savings accounts is less than Rs 10,000, you can avail income tax refund on the same.
Notably, the deduction is applicable only on interest on NRO savings accounts and not on NRO fixed deposits (4).
Also, as mentioned above, if you are a resident of any of the countries with whom India has signed a DTAA agreement, you can avail the benefit of a lower TDS rate and reduce your tax outgo.
Claiming Tax Benefits
As an NRI, it is mandatory for you to file your income-tax return (ITR) in India to claim any tax benefit or tax refund.
If you end up exhausting the deduction limit under Section 80TTA, you can still claim deductions on the gross-total Indian income under different tax-saving sections while filing your ITR.
For instance, if your gross-total income received in India is less than Rs 2.5 lakh for any given financial year, you can file your return and get a refund of the tax paid on the NRO (5) account.
While you cannot avoid paying TDS on NRO accounts, you can lower your tax outgo by claiming certain tax deductions while filing your income-tax returns.
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*Subject to change. Or we could use “Tax Rates as of April, 2021”
*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.
The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.