Is Interest on NRE FD (Fixed Deposit) Taxable?

August 07, 2020

As per the Income Tax Laws (as updated for Finance No. 2 Act, 2019), a non-resident is liable to pay income tax in India on the income accrued or deemed to be accrued in India and the income received or deemed to be received in India. As such, the prime inference may call for a conclusion that NRE Fixed Deposit interest may be taxable, as the interest income for the non-resident is arising from a bank account within India. However, in this regard, the Income Tax laws have been relaxed to exempt the interest on NRE accounts from tax to incentivize the NRIs to park their foreign income in India. As such, the interest on NRE FD (Fixed Deposit) and/ or NRE savings account is not taxable as per the provisions of Section 10(4) of the Income Tax Act 1961. However, it must be noted that NRI taxation in India also depends upon the provisions of FEMA (Foreign Exchange Management Act). Even the primary eligibility criteria to maintain an NRE account and to claim such interest income as exempt is that the person should be classified as a person resident outside India as per FEMA.

As per FEMA, a person can be considered as ‘person resident outside India’ (non-resident), if

  • His stay in India was less than the prescribed duration (less than 183 days) during the last financial year (FY), or
  • He comes to India for reasons other than the following:
    1. for performing his employment in India,
    2. for undertaking any business activity in India, or
    3. for any other purpose indicating his intention for stay of an uncertain duration in India.

If the person cannot be classified as a person resident outside India as per FEMA, he/ she must notify the bank in respect of the change in residential status from ‘Non-Resident’ to ‘Resident.’ Thereafter, the bank will re-designate the NRE account as a regular resident rupee account. An individual may also transfer the outstanding balance to Resident Foreign Currency (RFC) account. While the interest income on balance outstanding in a resident rupee account is taxable; the interest earned on RFC deposits can be claimed as exempt under Section 10(15)(iv)(fa) till the period the individual is a Resident but Not Ordinarily Resident. However, such interest income is taxable too when the residential status changes to Resident and Ordinarily Resident. One would also be liable to file an Income Tax Return (ITR) if the total taxable income in India exceeds Rs. 3lakhs.

Further, since an individual might be a resident of another country while being considered non-resident in India, the instances of double taxation may occur. As such, while such income is exempt as per NRI taxation in India, it may be subject to the federal taxes in the United States of America (USA) if you are deemed as a US resident for taxation purposes. The individuals may refer to the Double Tax Avoidance Agreement (DTAA) to consider the specific tax implications in respect of US tax laws. This is not the case only with interest income, but even other incomes earned by NRIs and may be considered taxable in both the countries. In such cases, Indian tax laws also permit to claim an income tax relief in respect of the tax paid in the foreign country up to the tax payable on such income in India.

The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules for you, as tax benefits are subject to changes due to changes in tax laws.

 

DISCLAIMER

The contents of this document are meant merely for information purposes. The information contained herein is subject to update, completion, revision, verification and amendment and the same may change materially. The information provided herein is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use would (by reason of that person‘s nationality, residence or otherwise) be contrary to law or regulation or would subject lClCl Bank or its affiliates to any licensing or registration requirements. This document is not an offer, invitation or solicitation of any kind to buy or sell any security and is not intended to create any rights or obligations. Nothing in this document is intended to constitute legal, tax, securities or investment advice, or opinion regarding the appropriateness of any investment, or a solicitation for any product or service. Please obtain professional legal, tax and other investment advice before making any investment or availing any product and services Any investment decisions that may be made by you or any decision to avail any product and services shall be at your sole discretion, independent analysis and at your own evaluation of the risks involved. The use of any information set out in this document is entirely at the recipient’s own risk. The information set out in this document has been prepared by ICICI Bank third party based upon projections which have been determined in good faith by lClCl Bank third party and from sources deemed reliable. There can be no assurance that such projections will prove to be accurate. lClCl Bank does not accept any responsibility for any errors whether caused by negligence or otherwise or for any loss or damage incurred by anyone in reliance on anything set out in this document. In preparing this document we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us or which was otherwise reviewed by us. Past performance cannot be a guide to future performance. ‘lClCl’ and the ‘I-man’ logo are the trademarks and property of lCICl Bank. Misuse of any intellectual property, or any other content displayed herein is strictly prohibited.”