RBI allows transfer from NRO to NRE account 2: Understand Tax Drag and Why transfer.

I have been receiving lot of inquiries whether to transfer, when to transfer, whether to break NRO FD to transfer funds out of NRO to NRE accounts and many more.
My answer has been and is always going to be Break FD and Transfer funds AS SOON AS POSSIBLE provided total cost of premature withdrawal is less than the present value of future benefits (including tax saving) from NRE FD.
Factors such as term of FD, amount, maturity date, premature penalty, effective tax rate, interest differential, expected interest rate movements, whether filing return in India, what you plan to do with your funds, etc. are very much important and should be considered before making any decision.
For most of the NRIs, Income Tax on interest of NRO savings or FD account materially affects their after-tax return.  If you are a long term investor, effective income tax rate is very high compared to nominal tax rate. The compounding of income tax makes effect greater than the tax rate. The effect is known as TAX DRAG. It means reduction of potential income due to taxes.
If you invest Rs. 100,000 which generates 10% return every year and if tax rate is 30.9%*, your tax drag in 5 years, 10 years and 20 years would be 35.03%, 40.35% and 51.02% (i.e. you pay more tax than your after-tax gain) respectively.
Shocked?                   See below for the calculation:

Investment 100,000; Return 10%; Tax 30.90%
Year Value Tax=0 Value After-Tax Gain at Tax=0 After-tax Gain Gain lost due to Tax Tax Drag
1 110,000 106,910 10,000 6,910 3,090 30.90%
2 121,000 114,297 21,000 14,297 6,703 31.92%
5 161,051 139,666 61,051 39,666 21,385 35.03%
10 259,374 195,067 159,374 95,067 64,307 40.35%
20 672,750 380,510 572,750 280,510 292,240 51.02%

If your investment generates 15% return every year, your tax drag for 10 years and 20 years would increase to 44.80% and 59.73% respectively.

Investment 100,000; Return 15%; Tax 30.90%
10 404,556 268,110 304,556 168,110 136,445 44.80%
20 1,636,654 718,832 1,536,654 618,832 917,822 59.73%

* Finance Act 2012 requires Tax Residency Certificate (TRC) for lower TDS rates as per DTAA. If NRIs are not able to obtain TRC from the Government of their resident countries, tax will be deducted at 30.9% from April 1, 2012. I would assume that TDS will be deducted @ 30.9% and not DTAA rate of 10%-15% for most of NRIs from April 1, 2012.
While there are other advantages of transfer from NRO to NRE as noted in my blog at http://nareshco.com/blog/?p=8, the key reason for my recommendation is “Tax Drag”.  Understanding tax drag is extremely important especially if you are in the highest tax bracket. Unfortunately, the concept is not known or understood by majority of bank employees, financial advisors or Chartered Accountants.
Please also review “Procedures for transferring funds from NRO to NRE”.

About Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) Mr. Jigar specializes on NRI Investments and Taxation. He is proud to be one of only 21 CFA Charterholders in India working as consultants. (In 2011, when he became CFA Charterholder, out of 97,173 CFA Charterholders in the World, only 697 Charterholders were in India and only 3% work as consultant; Source: www.newcfa.org). He received his MBA (Finance) from University of Illinois, Chicago, USA, CPA from USA and a Chartered Accountant from India. Jigar has over 15 years of professional experience including more than 4 years with KPMG USA’s Risk Advisory Services. Currently, he provides Wealth Management and taxation consulting serving clients from USA, UK, Americas, Europe, Middle East, Asia, Africa, Australia and India.


  1. Dear Jigar
    I have seen ur posts and find these extremly useful & informative. I have a NRO FD which will mature in June 2014. I have read in your post that now RBI permits funds transfer from NRO to NRE account. I have no other income except from intrest in India. If I want to transfer FD proceeds to NRE account, would it be subject to 30% tax or actual payable tax as per laws for Indian citizens in India. My intrest income from all sources including NRO FD, NRO savings account etc. would be about Rs. 3 lacs.
    Would you advise breaking FD now or let it mature, I claim back TDS in my return for FY 2013-14 and then transfer funds from NRO to NRE account. My basic concern is while converting from NRO to NRE is there any deduction made by bank under Income Tax laws. Somebody told me they will deduct 30% as tax, though I am not convinced about it as I have not read any such thing any where. Pl. guide.

  2. i want to repatriate money from my ICICI NRO account to my local account at Muscat. Whats the % of TDS involved?

    • No TDS. It is your money, which is after TDS so no additional tax needs to be deducted. Thanks.

  3. Can I transfer money from my dad’s general saving account to my NRO account? I have 2 bank accounts in 2 different banks (both NRO) but 1 of the bank allows internet banking for me to transfer money from my dad’s saving account to my NRO account but other doesn’t. Pl. guide

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) May 7, 2015 Reply

      You would need to define the nature of transfer whether gift, loan or any other. Once you know, transfer from any account is just a mode of transfer. Thanks.

  4. Hello Jigar,
    I have recently re-located to U.S. My money earnt in India so far is currently in a savings account. I have asked my bank to convert my savings account into a NRO account and i have also submitted an application to open a new NRE account.
    As the FD interest rates are same for NRO and NRE accounts , Should i transfer my money in NRO account to NRE account or FD it in my NRO account itself. Please advise.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) May 26, 2015 Reply

      Definitely. As soon as possible. Thanks.

  5. Dear Jigar
    1. Can my friend from US remit money to my NRE account in India? Do I have to pay tax on it. 2. Source of money remit to NRE account should be same as declare during account open or It can be transfer from other source also. Do we need to declare for this.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) June 6, 2016 Reply

      If your friend gives funds in India, there is a grey area as it may be considered as gift and gift from non-relative is taxable in India. I would recommend your friend to transfer funds in your bank account outside India and then you transfer funds from abroad into your NRE account. You also need to comply with gift tax and other reporting requirements of your country of residence. Please note that after FATCA and MCAA agreements signed with USA and OECD countries, income and financial details of accounts hold by NRIs will be shared with respective countries where you reside. So please understand the implications of such transfer. Thanks.

  6. hello dear, I have send 10,00,000 inr from my nri account to my friend current account in india for purchasing some materials for my business… unfortunately I have cancelled that plan and need my money back …so can he transfer to my nro account and if possible to transfer should I pay any tax for my money…or should I show the source of my income
    please reply to althuksd@gmail.com

    • Tax is on income. So only if you receive anything more than the 10L given for purchase of material, you would pay tax on the additional amount. I think you will be able to credit/deposit the cheque from your friend in your NRO account. The bank may ask for an explanation and you may provide the copy of the bank statement providing the trail of money. Thanks.

  7. 1) I have a SBI NRE a/c in India. I have transferred about Rs 30 lakhs to this a/c since the past 3 years from SBI UK. All transfers have been done online. I have been earning some interest in the NRE a/c. Now I want to transfer this money back to my SBI UK a/c. Will I have to pay any tax in India as I have earned some interest in India? I do not have a PAN number or an Aadhar card. I am a British citizen.
    2) Can a British citizen get a PAN number? I do not have any income in India.
    3) Can a British citizen get an Aadhar card?
    4) I will inherit money from parents’ property in the future so should I apply for a PAN number?

    • 1. The interest income on NRE accounts is exempt from income tax in India. PAN is not required for remittance of funds out of NRE account to UK.
      2. Yes, you can get a PAN.
      3. As you are a UK citizen living in UK, you can not get an Aadhar card. It is only for residents.
      4. It is recommended to apply for PAN as the inheritance money will be credited to your NRO account and PAN will be required to transfer funds from NRO to NRE or for remittance to UK. Thanks.

  8. I have sent some money in USD to my domestic savings account and converted it to FD.Now I want to bring this money back to NRE account. Will I have to first transfer it to NRO and then to NRE? What will be my tax obligation .I have paid tax for all the domestic FD.

    • An NRI is not allowed to have a resident account. The resident account is converted / designated as NRO on becoming NRI. Keeping resident account is against the FEMA provision. I would recommend to immediately convert your resident account to NRO and then transfer to NRE. Thanks.

  9. I am a NRI . Can I buy bitcoin from country where I am presently working , transfer to Indian exchange ,sell it in India and transfer money to my NRO account. Do you see anything illegal doing this way transfer my money to India. I can show proof of fund for buying bitcoin.

    • RBI has not allowed trading in crypto currency by NRIs so I would not recommend. Thanks.

  10. Dear Mr Jigar, My self vikram makwana NRI staying in UAE since 10 Yrs with family.
    I think i got the right person who can answer my query as stated here..
    I have 4 NRE AC (3 AC jointly held with my wife & 1 AC on my wife name kept my self as nominee). Also having one NRO AC. Wife is housewife.
    Now i am planning to invest about 50Lcs in the Govt aproved tender of Constructing & operating Sewage Treatment unit. My friend who is contractor of the same will look after it.
    Contract is valued @ 95 Crore where 10% (9.5 Crore) of initial fund will have to be presented & shown before start the job.
    Now here i want to make apx 5% of partnership with the contractor my friend by parking 50Lcs to his Acount where as the job will be progressing ahead, part payment will be realeased by Govt to my friend/ contractor & he will be returning the same back to me in installments.
    Can i receive the same fund direct to my NRI AC showing no profit no loss theory?
    Or i have to first receive to NRO & then to NRI AC?
    Will it be good idea if i get the profit earned in cash (NO SHOW)?
    Or is it possible that the main principal (50 Lcs) can be deposited direct to NRI AC & the profit earned will be parked to NRO AC?
    Pls advice….
    The total project duration is 12 years (2 yrs of construction followed with 10 years of operation & Maintenance). Means I am going to receive the principal & profit in installments.

    • 1. First you need to define the nature of transaction – whether a partnership or a loan and follow rules related to the respective nature. As both are allowed on a non-repartriable basis, the money can only be credited to NRO account. And, only after CA certificate, may be transferred to NRE.
      2. I would not recommend to have the profit in cash due to various laws relating to black money and undisclosed income and it is not a right thing to do.
      3. All money would go to NRO account only. Thanks.

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