Generally, most Non-resident Indians (NRIs) prefer to maintain their NRE deposits accounts to save their foreign income in India. It is to be noted that these NRE accounts can only help the NRIs to transfer a portion of the income earned outside India to the home country of the NRI in a hassle free manner. However, these accounts also provide a good opportunity to avenue investment in the form of NRE fixed deposits (FDs).
Non-Resident External Deposits are fixed deposits that are opened by Non-Resident Indians (NRIs) by using their NRE earnings to save their foreign incomes. NRE deposits are considered one of the most convenient investment options for NRIs so as to fetch higher returns as compared to other regular savings deposits. In NRE deposits, the principal and interest stays completely repatriable.
Taxability of Interest earned on NRE Deposits
According to the provisions of the Income tax laws of India, NRIs are subject to pay income tax in India if the income has been earned or accrued in India. As an NRE deposits account only contains the income that has been generated outside India, it is not subject to tax, in other words, the deposits in the NRE deposits accounts are completely exempted from tax or tax free.
This suggests that interest earned on NRE deposits accounts and NRE deposits are not taxable under the provisions of Section 10(4) of the Income Tax Act 1961 in India. However, it should be noted that the basic eligibility criteria to hold a NRE deposits account and earn interest income i.e. tax free, a person must qualify as an NRI under the provisions of Foreign Exchange Management Act (FEMA).
What is the Consideration of NRI as per FEMA?
Foreign Exchange Management Act (FEMA) states the guidelines on whether to make a specific investment or not. For example, if a person wants to open an NRE deposits account then he or she must qualify as an NRI. The Foreign Exchange Management Act provides the term “Person Residing Outside India” for NRI. The definition of the term “Person Residing outside India” has been provided under Section 2 of the Foreign Exchange Management Act which states that a person will be termed as ” Person Residing outside India” if he or she resides less than 183 days in India during the preceding financial year. However, there are some limitations or exceptions to this aforesaid condition. The details are provided below.
Although the a person resides for less than 183 days in India during the preceding financial year, he or she can be termed as resident in India in case his or her stay is due to the following reasons:
- The stay is due to taking of any employment opportunities in India
- The stay is due to conduct any business activity or vacation in India
- To stay is due to any other purpose with an intention to stay in India for an undecided period.
Thus, the NRIs who are permanently settled and residing outside India will always be treated as an NRI under the provisions of the Foreign Exchange Management Act irrespective of the number of days of stay in India. Also, it is to be noted that FEMA will consider a person as an NRI from the date on which he or she left India for any business, vocation or employment opportunities in another country. In such a case, the duration of stay in India will not be considered. Accordingly, the person will be able to make foreign investments and can also hold an NRE or FCNR account.
This can be simplified with an example. For example, if a person left India on 14 March 2022, then from 25 March 2022, he or she will be an NRI according to the rules of FEMA. Also, if a person is leaving India for studies as a student, then also he or she will be termed as NRI from the date of leaving India.
On the other hand, persons who are returning to India permanently from abroad will be considered as residents under the provisions of FEMA from the date they returned to India. Accordingly, the NRI accounts of those returning NRIs will also be redesignated from NRI to resident with immediate effect.
When is NRE deposits account taxable for interests earned?
According to the provisions under the Foreign Exchange Management Act, NRIs returning to India permanently are considered resident in India from the date of their arrival to India and these NRIs maintaining an NRE deposits account are considered as a violation.
After the permanent return of NRIs to India, NRE deposits accounts must be converted to resident accounts or the funds held in these NRE deposits accounts must be transferred to Resident Foreign Currency (RFC) account with immediate effect.
Once the aforesaid conversion of accounts are done, one can have tax free interest income of these accounts provided the individual must qualify as an Resident But Not Ordinarily Resident (RNOR). It is an automatic transactional status that is being provided to NRIs for 3 years. This will help the NRIs to transfer the assets they have acquired abroad to India without paying huge amounts of taxes. As an Resident But not Ordinarily Resident (RNOR), one can get the benefit of some tax-breaks as an Non- Resident Indian (NRI).
However, gradually as soon as the residential status changes from Resident But Not Ordinarily Resident to Ordinary Resident, then all the income will be taxable in India including the amount earned across the globe as well as interest income.
Exceptions for NRIs Regarding Taxation Rules in India
To encourage the NRIs living abroad, the Government of India and Income Tax Department has provided certain types of income as exemption from taxes so that NRIs can invest in their home country. The following are some of the earning of the NRIs which are tax-free:
- Interest received on FCNR (Foreign Currency Non-Resident Account) and NRE
- Interest received on savings certificate and government issued bonds
- Tax on capital gains is exempted under Section 54, 54F and 54EC of the Income Tax Act, 1961
- Long-term Capital Gains less than Rs. 1 Lakh from listed equity shares and equity-scheme mutual funds investment held over 12 months is exempted from tax.
How can NRIs get Tax Exemption for NRE deposits in India?
An NRI does not have to file the ITR in India if his or her earnings in India come under the category of tax-free income as mentioned above in the article and also TDS (Tax Deducted at Source) has already been deducted on these earnings.
It is to be noted that the obligation of furnishing the ITR will be required if the total income earned by NRI in India exceeds the threshold limit of the income tax slab of that particular assessment year.
However, filing an ITR is also important for NRIs if they want to obtain tax deductions and exemptions on their total income. One of the examples of such deductions is under Section 80C of the Income Tax Act, one can get deductions up to 1.5 Lakhs. Considering the tax deduction and minimum exemption, the remaining income of the NRIs earned in India is taxable. It is to be noted that the rate of income tax for NRI is the same as that of a resident Indian. In simple words, the income tax slab rates are the same for NRIs as well as Resident Indian.
Note: Income tax Returns can be filled by logging in to the official website of Income tax Department of India i.e. www.incometaxindiaefiling.gov.in. On this website tax refunds can also be claimed if TDS paid is higher than the actual tax liability.
From the above analysis and explanation, it can be concluded that the NRIs or individuals planning to invest in NRE FD accounts must be aware that interest income received from these accounts will be tax-free or exempted from tax until and unless he or she qualifies as NRI. Also, if the NRIs/individuals return to India for an unlimited period of time or permanently having an NRE FD account then as per Income Tax laws in India it will be considered as violation and the NRE FD account must be designated as resident account.