The NRO account decoded: parking your Indian rent, pension and dividends and getting it abroad

An Indian passport surrendered for a foreign one does not sever a person's financial ties to India. The flat in Pune still earns rent, the equity portfolio still declares dividends, the former employer still credits a pension, and a fixed deposit still throws off interest. Under the Foreign Exchange Management Act, 1999 (FEMA), the moment a person becomes resident outside India these rupee inflows can no longer land in an ordinary savings account. They must be routed through a Non-Resident Ordinary (NRO) rupee account, the designated home for a non-resident's India-source income. The Reserve Bank of India Master Circular on NRO accounts is the governing instrument, and it has permitted any person resident outside India per FEMA to open and maintain such an account for bonafide rupee transactions.

The NRO account is frequently confused with its tax-friendly cousin, the Non-Resident External (NRE) account. The distinction is not cosmetic: NRE interest is exempt for a qualifying non-resident, while every rupee of NRO interest is taxable in India and suffers TDS under Section 195 of the Income Tax Act, 1961. Getting the routing right at the outset - and understanding the USD 1 million annual repatriation ceiling that governs how the money leaves India - is the difference between a clean remittance and a blocked transfer. This guide walks through the FEMA position, the Indian tax treatment, the foreign-tax-credit interaction and the mechanics of moving NRO balances abroad.

FEMA / DTAA Position

FEMA 1999 is the statute that decides who may hold what kind of account. Section 3 of the Act restricts any unauthorised dealing in foreign exchange, and Section 6 provides that capital-account transactions require RBI permission unless specifically permitted. The NRO account sits inside this permitted framework: the RBI Master Circular expressly allows a person resident outside India to open and operate one for legitimate rupee dues. The permitted credits are wide - rent, dividend, pension and interest, plus the sale proceeds of assets held in India, and gifts or loans received from resident close relatives within the Liberalised Remittance Scheme (LRS) limit that binds the resident remitter.

That LRS limit matters for anyone whose parents wish to fund the account. Under Section 6 of FEMA the LRS ceiling is USD 250,000 per financial year for a resident individual, so a resident parent can remit up to that amount into a child's NRO account in a year without separate RBI approval. Crucially, the NRO account is a rupee account: balances are denominated in Indian rupees and carry full rupee-exchange-rate risk, unlike the foreign-currency FCNR(B) deposit that was launched to insulate savers from currency movement.

The Double Taxation Avoidance Agreement (DTAA) sits on top of FEMA and decides how the income parked in the account is taxed between two countries. A recurring myth is that a treaty makes India-source income "exempt" in India. It does not. India retains primary taxing rights over India-source rent, interest and capital gains; the treaty merely caps the withholding rate on some flows and hands the residence country the job of relieving double taxation. The table below sets out the headline treaty rates for the three most common NRI corridors, each drawn from the operative treaty text.

Two treaty nuances are worth flagging. Under Article 10 of the India-USA treaty the 15% dividend rate applies only where the recipient holds at least 10% of the voting stock in a direct parent-subsidiary relationship; ordinary portfolio investors face the 25% rate. And a UAE resident claiming treaty relief must produce a Tax Residency Certificate evidencing a UAE establishment, because the UAE levies no personal income tax and the certificate is what proves treaty eligibility.

Tax Treatment in India

Every credit that lands in an NRO account is India-source income and enters the Indian tax net. Interest earned on the NRO balance itself is fully taxable and, unlike NRE interest, enjoys no exemption. Rental income is taxable under the head "Income from house property" after the standard 30% statutory deduction, and dividends declared by Indian companies are taxable in the shareholder's hands. Because the account holder is a non-resident, the paying bank or company must withhold tax at source under Section 195 before crediting the net amount.

Section 195 is the operative withholding provision, and its logic is precise: tax is deducted at the rate specified in the DTAA or the rate under the Income Tax Act, whichever is lower. A US resident earning NRO interest can therefore restrict the bank's withholding to the treaty rate of 15%, and a UAE resident to 12.5%, but only by furnishing a valid Tax Residency Certificate together with Form 10F to the deductor. Absent those documents, the bank defaults to the higher domestic rate and the shortfall must be reclaimed by filing a return. The Income Tax Department's Section 195 provisions are the reference point for the compliance forms.

On top of the base tax the non-resident bears the standard add-ons. A health and education cess of 4% applies to the sum of tax and surcharge. Surcharge itself is graduated by total income - 10% between Rs 50 lakh and Rs 1 crore, 15% between Rs 1 crore and Rs 2 crore, and 25% between Rs 2 crore and Rs 5 crore. A vital 2023 reform is that the surcharge in the new tax regime is capped at 25% even above Rs 5 crore, so the older 37% top slab no longer applies for anyone on the default regime. The table below summarises how the common NRO credits are taxed in India.

For the retirement flows that often dominate a returning NRI's income, note that a death-cum-retirement gratuity is exempt under Section 10(10) of the Income Tax Act up to Rs 20 lakh for a non-government employee, the ceiling having been raised from Rs 10 lakh by the Finance Act, 2018. Anyone estimating their net take-home on Indian income can model the slab, surcharge and cess interaction using the Oquilia NRI income tax calculator and, for property, the rental income tax calculator.

Tax Treatment Abroad

Paying tax in India does not end the matter, because most countries of residence tax their residents on worldwide income. A US green-card holder, a UK-resident and an Australian resident must all declare their Indian rent, interest and gains on their home-country return. The mechanism that prevents the same income being taxed twice is the foreign tax credit, and it is anchored in the treaty itself - Article 24 of the India-USA DTAA obliges the residence country to grant a credit for Indian tax paid.

The credit is not a refund and is rarely a full wash. It is capped at the residence country's own tax on that slice of foreign income, so if India's effective rate on a flow exceeds the home rate, the excess is not recoverable and simply reduces the after-tax yield. Where the home rate is higher - common for US residents in higher federal brackets - the Indian tax offsets part of the US liability and the resident tops up the difference. Timing mismatches between the Indian financial year (April to March) and a foreign tax year (for example the US calendar year) frequently complicate the credit claim and require careful apportionment of the Section 195 tax deducted.

This is also where the "exempt" myth does the most damage. A UAE resident might assume that because the UAE imposes no personal income tax, Indian capital gains escape tax entirely. They do not: India taxes long-term capital gains on Indian assets at 12.5%, the UAE grants no offsetting credit because it levies no tax to credit against, and the Indian charge is the final cost. Understanding the foreign-tax-credit interaction before a sale, rather than after, is what separates efficient repatriation from an avoidable leakage. The DTAA glossary entry explains the credit-versus-exemption distinction in more depth.

Repatriation Mechanics

Once income has been earned, taxed and parked, the final question is how to move it abroad - and this is where the NRO account is deliberately more restrictive than its siblings. FEMA draws a bright line between "current income" and "balances". Current income - the rent, dividend, pension and interest of the year - is freely repatriable outside any cap once the applicable tax has been paid. Accumulated balances and the sale proceeds of assets, however, are subject to the ceiling that defines the entire NRO regime: remittances of up to USD 1 million per financial year (April to March) for all bonafide purposes.

The USD 1 million window is not automatic. The remitting bank requires two documents before it will process the transfer: a remitter undertaking in Form 15CA and a Chartered Accountant certificate in Form 15CB confirming that the appropriate tax has been deducted or paid. This CA certification is the compliance backbone of the entire remittance and the reason the process is document-heavy rather than instantaneous. Once cleared, funds move from the rupee NRO account into the remitter's overseas account in the foreign currency of choice.

The account architecture below shows why the NRO is the collection account rather than the export account, and why many NRIs pair it with an NRE account for freely repatriable savings.

A common optimisation is to move eligible NRO funds into an NRE account, which converts blocked rupee balances into a freely repatriable pool - a transfer that itself counts within the USD 1 million limit and needs the same Form 15CA and Form 15CB backing. You can size a specific remittance and the tax that must clear first using the Oquilia repatriation calculator, and the NRO account glossary entry, the NRE account entry and the TDS glossary entry cover the definitions the banks will test you on. Get the paperwork right and USD 1 million a year is a generous runway; get it wrong and the money stays trapped in rupees.

FAQ

Who is allowed to open an NRO account in India?

Any person resident outside India as defined under FEMA 1999 may open and maintain an NRO account for bonafide rupee transactions, per the RBI Master Circular on NRO accounts. It can be credited with legitimate Indian dues such as rent, dividend, pension and interest, and interest earned on the balance is taxable in India with TDS deducted under Section 195.

How much can I repatriate from my NRO account each year?

NRO balances and asset-sale proceeds may be remitted abroad up to USD 1 million per financial year, running April to March, for all bonafide purposes. The transfer requires a remitter undertaking in Form 15CA and a Chartered Accountant certificate in Form 15CB, while current income such as rent, dividend, pension and interest is freely repatriable outside this USD 1 million cap.

Is NRO interest taxed differently from NRE interest?

Yes. NRO interest is fully taxable in India and TDS is deducted under Section 195, whereas NRE and FCNR(B) interest is exempt for a person qualifying as a non-resident. Under Section 195 the tax is withheld at the DTAA rate or the Income Tax Act rate, whichever is lower.

Can I reduce the TDS on my NRO interest using a tax treaty?

Yes. Section 195 read with the DTAA applies the treaty interest rate where it is lower - 15% for US and UK residents and 12.5% for UAE residents. You must furnish a valid Tax Residency Certificate and Form 10F to the deducting bank; without them the bank defaults to the higher domestic rate and you must reclaim the excess by filing a return.

Can my parents in India gift money into my NRO account?

Yes. Gifts and loans from resident close relatives can be credited to an NRO account within the Liberalised Remittance Scheme limit of USD 250,000 per financial year that binds the resident remitter under Section 6 of FEMA. The credit is a permitted transaction and does not need separate RBI approval within that ceiling.

Does India treat capital gains on Indian assets as exempt under any DTAA?

No. India retains the right to tax capital gains arising on Indian assets, and long-term capital gains are charged at 12.5%. None of the US, UK or UAE treaties treat such gains as exempt in India; relief in the residence country comes only as a foreign tax credit, and where that country levies no tax - as with the UAE - the 12.5% Indian charge is the final cost.

What is the difference between current income and balances for repatriation?

Current income means the rent, dividend, pension and interest earned during the year, and it is freely repatriable once tax is paid, outside the USD 1 million cap. Balances and asset-sale proceeds are the accumulated corpus and must be remitted within the USD 1 million per financial year limit, each transfer supported by Form 15CA and Form 15CB.