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:
- for performing his employment in India,
- for undertaking any business activity in India, or
- 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.
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