NRE and NRO Interest: How the Tax Treatment Differs
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NRE and NRO accounts, both commonly held by non resident Indians, are treated quite differently when it comes to tax on the interest they earn. Interest earned on an NRE account is generally exempt from Indian income tax, reflecting the account's role in holding foreign earnings that have simply been moved to India, whereas interest on an NRO account, which typically holds India sourced income, is taxable there.
Because NRO account interest is taxable, banks generally deduct tax at source before crediting interest to the account, and the account holder may need to file a return in India to reconcile that withholding against their actual liability, particularly if deductions or exemptions apply. NRE interest, by contrast, generally does not involve this withholding step given its exempt status.
This Indian exemption on NRE interest does not necessarily carry over to the account holder's country of tax residence, where worldwide income rules may still require the interest to be declared regardless of its treatment in India. Understanding both sides of the picture, the Indian tax position and the resident country's position, avoids an incomplete view of the overall obligation.