This article deals with complex taxation rules around NRO and NRE accounts and how TDS and TCS applies to them.

📚 Table of Contents

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• Understanding TDS, TCS and LRS
• Understanding NRO and NRE bank accounts
  • Non-Resident External (NRE) Account
  • Non-Resident Ordinary (NRO) Account
  • Foreign Currency Non-Resident (FCNR) Account
• Does TCS and TDS apply to NRO account transfers?

To understand the applicability of TCS and TDS on NRO account transfers, we must understand a few concepts in detail first.

Understanding TDS, TCS and LRS

Under the RBI’s Liberalised Remittance Scheme (LRS), resident Indians can spend up to $250,000 (over ₹2 crores) per financial year on investing in foreign stocks, children’s education, foreign tours, and foreign medical expenses.

LRS is applicable to two types of transactions:

• Current Account: Foreign trips, gifts to close relative NRIs/PIOs, foreign trips (business/leisure), medical treatment, studying abroad, expenses for working abroad and funding the expenses of close relatives like parent sending money to child studying abroad for day-to-day expenses
• Capital Account: Purchase foreign assets like shares / ETFs / Mutual funds / Property, open a foreign (non-Rupee) bank account, loaning money to NRIs outside India

Feature	Description
Purpose	Allows resident individuals to remit funds abroad for permissible current or capital account transactions.
Eligible Individuals	All resident individuals, including minors. (For minors, remittances are made by a parent or guardian).
Remittance Limit	Up to USD 250,000 per financial year (April-March).
Permitted Transactions	* Private visits. * Gifts/donations. * Overseas employment. * Emigration. * Maintenance of close relatives abroad. * Business trips. * Medical treatment. * Overseas education. * Purchase of property abroad. * Investments in equity or debt.
Prohibited Transactions	* Remittances for prohibited items under Schedule I of FEMA (Current Account Transactions) Rules, 2000. * Remittances to countries identified by FATF as “non-cooperative countries and territories.” * Remittances for margin trading (e.g foreign FnO) or purchasing lottery tickets.

Some of these transactions are subject to Tax Collection at Source (TCS) as per the rates below.

TCS rates from 1st April 2025 onwards:

Purpose of Remittance	TCS Rate	Threshold
LRS for education purpose from education loan	NIL	Any Amount
LRS for the purpose of education, other than above, or for medical treatment	Up to ₹10 Lakh: NIL Above ₹10 Lakh: 5%, 10% if sender PAN is inoperative	₹10 Lakh per FY
Any other purpose under LRS (including overseas tour packages or investing in foreign stocks/ETFs)	Up to ₹10 Lakh: NIL Above ₹10 Lakh: 20%	₹10 Lakh per FY

There are two important points you must remember regarding TCS:

• TCS is not an extra tax. It is adjusted against total tax liability at the time of filing income tax return or if you fill Form 12BAA to offset TCS against TDS from salary or other TDS sources
• TCS is over and above the amount remitted. If you remit $100,000 in a financial year, and the TCS rate is 10% then the bank collects $10,000 from you and sends out $100,000. So you need to have $110,000 in your account when planning the remittance.

Tax Deduction at Source (TDS) is the tax deducted before the income comes to you.

A classic example of TDS is a bank deducting the due tax on interest before sending the interest to your account. Under Section 195, anyone making a payment to NRIs that is income chargeable under tax must deduct TDS first.

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Understanding NRO and NRE bank accounts

To comply with the Foreign Exchange Management Act (FEMA) rules, an NRI cannot have regular savings accounts in India. Therefore, you must convert existing accounts to NRO accounts and excess accounts must be closed. This step is important once your status changes from resident Indian to NRI and can be done either online, for selected banks, or during your next visit to India.

Note: Resident Foreign Currency (RFC) are for NRIs who have returned to India and used to store foreign currency, say in USD, GBP and EUR. These amounts are repatriable and can receive funds from abroad or other NRE / FCNR accounts.

Feature	NRO Account	NRE Account	FCNR(B) Account
Income Source	Indian income (including capital gains)	Primarily foreign income, some taxable Indian income	Foreign currency deposits
Repatriation	Allowed with Forms 15CA/15CB, up to $1 million/year	Fully repatriable (for foreign income and taxable Indian income)	Fully repatriable
Limits	Unlimited when deposited; $1 million/year on repatriation	No limits on deposits/withdrawals	No limits on deposits/withdrawals
Capital Gains	Can receive proceeds from sale of assets	Cannot receive proceeds from sale of assets directly. Proceeds must go to NRO	Cannot receive proceeds from sale of assets.
Taxation	TDS applies to Indian income	Generally no tax on foreign income, tax applies to specific Indian income	Interest earned is tax-free in India
Currency	INR and Foreign currency	Foreign currency	Foreign currency

Non-Resident External (NRE) Account

An NRE account can be opened only once you are an NRI as a fresh account. Old accounts, which existed when you were a resident Indian, must be converted into NRO accounts, not NRE accounts. You can check your NRI status here: Who is an NRI and who is not? Understanding FEMA and NRE/NRO bank accounts.

This account is used to send money to India. The features and uses are:

• This is a fresh account that can only be opened by an NRI. Existing resident Indian or NRO accounts cannot be converted to NRE
• Money deposited in this account must originate outside India.
• Interest earned is tax-free in India but may be taxable in the country where the NRI is residing.
• You can send both interest and principal out of India without limits.
• Deposits can only be made in foreign currency, and withdrawals are in INR.
• Joint accounts are allowed only with another NRI.
• You can transfer funds to other NRE or NRO accounts.
• It may be used for stock investing but is not recommended.
• It is the best option for Mutual Fund investing due to easy repatriation.
• It cannot be used for investing in RBI/Gilt bonds.

Non-Resident Ordinary (NRO) Account

This account is used for any income and investments in India. The features and uses are:

• Existing savings accounts are converted to NRO accounts (and not NRE) once you leave the country and status changes to NRI from resident Indian as per tax residency rules
• Interest earned is taxable in India at current slab rates. The benefit of the Double Taxation Avoidance Agreement (DTAA) is available with most countries so that you can offset tax paid in India as an input tax credit in your home country.
• You can send both interest and principal out of India, but the principal must be within $1 million. A CA must certify that you have paid taxes on this income.
• You can make deposits in both foreign currency and INR, and withdrawals are in INR.
• Joint accounts are allowed with another NRI or a resident.
• Incoming transfer into NRO from Indian resident accounts do not attract TCS under the LRS rules
• Funds can be transferred only to another NRO account or to even resident accounts.
• Transfer from NRO to an NRE account i.e. for repatriation is capped at $1 million per financial year and requires CA input on the required forms to be filled
• This account is used to receive income from interest, FD, rent, stock and MF dividends, and the proceeds from selling real estate, stocks, and mutual funds.
• It can be used for both stock and MF investing.
• Only NRO accounts can be used for investing in and for receiving interest from RBI/Gilt bonds from the RBI Retail Direct Portal.

Foreign Currency Non-Resident (FCNR) Account

Note: FCNR(A) accounts were discontinued in 1993 and used to have exchange rate guarantee from the RBI. Now only FCNR(B) accounts, without exchange rate guarantees, exist.

• NRIs or PIO card holders can open FCNR(B) accounts either singly or jointly with other NRIs
• FCNR(B) accounts are term deposit (FD-type) accounts held in foreign currency (USD, EUR, GBP, AUD, SGD, CAD, CHF, HKD are typical)
• Interest is paid every 180 days and the account matures in one to five years
• Interest earned is tax-free in India
• Both principal and interest are fully repatriable
• Pre-mature withdrawal is possible with interest rate penalties
• They eliminate currency conversion risk since they are held in foreign currency
• Can be used for payments in India, making investments and transfers to other NRE or FCNR accounts

Does TCS and TDS apply to NRO account transfers?

Does TCS and TDS apply to NRO account transfers?

TCS applies only to remittances under the Liberalised Remittance Scheme (LRS), not internal transfers to an NRO account. However, TDS is deducted if the transferred amount is classified as taxable income under Section 195 of the Income Tax Act. If the transfer is a gift or post-tax income, no TDS is applicable. Repatriation of funds from NRO to NRE accounts requires Form 15CA/15CB certification by a CA.

Here are the rules we will use to answer this question:

• Rule 1: NRI receiving income chargeable to tax must have TDS
• Rule 2: TCS on LRS is applicable only for remittances

The corollary to Rule 1 is that if the transfer is not an income i.e. not classified as other income, then it is not subject to TDS under Section 195. It is important to note that the source of funds that is transferred must be post-tax income to not come under TDS. Residents making such gifts should make a notarized gift deed if it is required for a tax audit in the future.

For the concept of TCS applicability under the LRS rules, the amount being transferred to the NRO account is not a remittance. If the NRI later plans to remit the money, CA involvement will be required for the required forms (Form15A/B) so that the source of funds and tax-paid status are correctly captured). Therefore, although transfers from resident to NRO account transfers can be under the LRs purview, under the current account transaction category, there will not be any TDS.