Is foreign-earned salary in NRE account taxable in India? Here's what rules say

Non-resident Indians (NRIs) have the option to transfer their overseas earnings to India through non-resident external (NRE) accounts to manage investments, family expenses and savings in the country. However, a common question arise over whether salary earned abroad becomes taxable in India once it is remitted to an Indian bank account.

An NRE (Non-Resident External) account is a rupee-denominated bank account, in which deposits are made in foreign currency and converted to Indian rupees for withdrawal purposes. These accounts can be opened as a savings, current, recurring, or fixed deposit account.

Is foreign-earned salary in NRE account taxable in India?

A few benefits are extended to non-resident individuals under Indian tax provisions. Broadly, global income of a non-resident is not taxable in India, according to information available on the Income Tax Department's website.

Meanwhile, certain categories of interest income, particularly those arising from specified NRI accounts such as NRE and FCNR (Foreign Currency Non-Resident) deposits, are also exempt from tax in India, subject to applicable conditions under the Income Tax Act.

As a result, foreign-earned salary credited into an NRE account is generally not taxable in India if the individual qualifies as a non-resident for tax purposes. However, tax liability is determined based on residential status under the Income Tax Act, and only income that is taxable in India (or arises or is received in India) falls within the Indian tax net.

Key things to know about NRE account

A NRE account is designed to help non-resident Indians manage their foreign earnings in India while maintaining full repairability of funds. Here's how the money transfer system works for NRIs:

• You can freely transfer both principal and interest amount from an NRE account to a foreign bank account without any complications and restrictions
• Only income earned outside India can be deposited into an NRE account, and local Indian income is not permitted.
• Linking an NRE account to investment platforms allows seamless and faster investments in Indian mutual funds and other assets, according to ClearTax.
• An NRE account is primarily used for personal banking, business transactions and making investments in India with foreign earnings.

How is NRE account different from NRO account?

While an NRE account is only meant for foreign income, an NRO (Non-Resident Ordinary) account is a rupee-denominated account for NRIs to manage income earned in India.

Such income could be earned by a NRI from property rent, dividends, pensions, and other domestic earnings. In this case, deposits can be made in both foreign and Indian currency, but withdrawals are only allowed in Indian rupees.

However, unlike the tax benefits available under an NRE account, interest earned in a NRO account is taxable in India. Such income is subject to Tax Deducted at Source (TDS) at applicable rates, although NRIs can claim relief under the Double Taxation Avoidance Agreement (DTAA), depending on their country of residence and eligibility conditions, according to ClearTax.

Additionally, repatriation of principal is capped at $1 million per financial year, subject to documentation. You can also apply for an NRO account jointly with a resident Indian or even an NRI.

Both NRE and NRO opened as savings or current accounts, depending on your financial needs. In both accounts, you are required to maintain an average monthly balance of ₹75,000.

Why is this important?

This is particularly important under the Foreign Exchange Management Act (FEMA) guidelines, which require indivduals to update their residential status in bank records once they become non-residents. Accordingly, an NRI is not permitted to continue operating a regular resident savings account in India in their name. Instead, such accounts must be redesignated or converted into a NRE or NRO account based on the nature of income being held.

If you fail to regularise the account status in line with FEMA rules can lead to compliance issues and penalties under applicable regulations.