Interest on NRE rupee account can be exempt from tax under FEMA

On becoming a ‘person resident in India’ under Fema, the onus is on the individual to notify the bank of the change in status

Interest earned on NRE rupee account (savings or fixed deposit) is exempt from tax, provided the person qualifies as a ‘person resident outside India’ under FEMA

A person, who is a permanent resident of foreign country and is a non-resident as per Foreign Exchange Management Act (FEMA), 1999, stays in India for more than 182 days. Will the income received by him as interest on non-resident external (NRE) account be exempt under section 10(4) of the Act?

—Rudra Bandi

After working in Singapore for 20 years, I returned to India permanently last year. I had opened non-resident external (NRE) fixed deposits (FDs) with scheduled banks in India, while I was abroad, which are due for maturity in 2017. After my return, my residential status is that of Resident but Not Ordinarily Resident (RNOR) for the next two assessment years (2015-16 and 2016-17). For financial years (FYs) 2015-16 and 2016-17, I would be accruing interest on my NRE FDs. What is the tax liability?

—M.Venkateswaran

Any interest earned on the deposit in an NRE account is exempt under section 10(4)(ii) for an individual who is a ‘person resident outside India’ as per the Foreign Exchange Management Act,1999, (Fema) or who is a person permitted by the Reserve Bank of India to maintain the aforesaid account. A person returning to India permanently becomes a ‘person resident in India’ under Fema. On becoming a ‘person resident in India’ under this Act, the onus is on the individual to notify the bank of the change in status from being a ‘person resident outside India’ to ‘person resident in India’ so that NRE accounts are re-designated as resident accounts or the funds may be transferred to the Resident Foreign Currency (RFC) accounts (if the individual is eligible for this). Though the interest earned on a resident account is taxable in India, interest earned on deposits in an RFC account is exempt under section 10(15)(iv)(fa) till the period the individual is an RONR. You may check with your bank if you can open an RFC account and transfer your FDs in the NRE accounts to it to claim such exemption.

I live abroad but I have a rupee FD in India whose interest is credited to my savings account there. Do I need to file a return for this interest income despite the fact that the bank deducted tax at source (TDS)?

—Anu Singh

It is mandatory for an individual to file income tax return in case her gross total income (before allowing deductions under sections 80C to 80U) exceeds Rs.2,50,000 in a given FY (this limit is Rs.3,00,000 for senior citizens and Rs.5,00,000 for super senior citizens). However, in case gross total income in India does not exceed the limits specified above, the individual is not required to file her India tax return. It is, however, pertinent to note that if TDS is more than the actual tax liability, an income tax return must be filed to claim refund.

Interest earned on NRE rupee account (savings or fixed deposit) is exempt from tax, provided the person qualifies as a ‘person resident outside India’ under FEMA.

An individual would qualify as ‘person resident outside India’ if he was present in India for 182 days or less during the preceding financial year (FY), or he comes to stay in India for reasons other than the following: for or on taking up employment in India, for carrying on a business or vocation in India, or for any other purpose that would indicate his intention to stay in India for an uncertain period.

If the person qualifies as ‘person resident outside India’ under FEMA, then the interest received from an NRE account will be eligible for exemption under tax under Section 10(4).

What is the criteria for being called a non-resident Indian (NRI) under the income tax rules. In the first year of stay on L5 visa in the US, if a person has continuously spent more than 182 days out of India and the stay is continuous as on date, is this person entitled to be called an NRI? Being on L5, and still not doing any work since arrival in the US in April 2015, would this person be obliged to convert his regular saving bank account in to an non-resident ordinary (NRO) account under the tax rules? If yes, can the saving bank account be converted to an NRO account and what are the formalities involved?

—Onkar Chadha

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