NRI TAX RETURN FILING – TREATMENT OF INTEREST ON NRE DEPOSIT
Added: (Tue May 10 2022)
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NRI TAX RETURN FILING – TREATMENT OF INTEREST ON NRE DEPOSIT
Every year, millions of NRIs file their Income Tax Return in India. One of the important factors to be considered at the time of NRI tax return filing is their residential status. As a general rule, only income earned in India or accrues or arise in India is taxable in case of NRIs and income earned outside India is not taxable.
In this write up, we would be analyzing the treatment of interest earned on NRE accounts at the time of NRI Tax return filing in India.
Some of the incomes of the NRI which are taxable in India are as under:
a) Interest on savings account
b) Interest on Fixed deposits
c) Rental income earned in India
d) Gain on sale of immovable properties
e) Gain on sale of shares and mutual funds in India
When a person becomes NRI, his savings account in India is converted into NRO account either by himself or by banker. This account is maintained only in Indian Rupees.
Only person resident outside India can open NRO, NRE and FCNR account.
NRE accounts are also maintained in Indian Rupees in India. This account is opened by NRI for transferring his money earned in foreign country. Advantage is that any interest earned on NRE account is exempt from tax.
From NRO account, maximum amount which can be transferred outside India during a particular year is USD 1 million. Whereas there is no limit in sending money from NRE account abroad. When any amount is send from NRO account to outside India, tax @30% is charged.
Since both NRO and NRE accounts are maintained in Indian Rupees, in case any NRI want to keep money in Indian bank account in foreign currency, they may open FCNR account. FCNR account can be held till maturity. After maturity of FCNR account, either considers it as ordinary account or RFC account in foreign currency.
What happens to Interest on NRE account when NRI comes back to India?
As per FEMA laws, once NRI have lost their NRI status, they need to close their NRO and NRE accounts in India, whereas FCNR accounts can be held till maturity.
Interest on NRE FDR are exempt from tax as per FEMA laws only for person resident outside India
When NRI comes back, they have to immediately close their NRE and NRO accounts.
What happens to NRE FDRs?
In case NRI has booked NRE FDRs for say 9 years, and when he becomes Resident, 4 years have passed, now, such NRE FDs will be considered as normal Resident FDRs and would become taxable as per FEMA laws.
Here, question arises that why NRI should continue FD in NRE account? Well the advantage of continuing with FDs is that interest rates at which FDs was booked at the time of start will continue to be given till maturity.
Interest earned on NRE FDs till last 4 years would be exempt from tax. However, interest earned from 5th year onwards would be taxable every year. NRI needs to ask for interest certificate from banker and need to pay taxes on interest earned in any particular year.
At the time of maturity, not the entire interest till maturity becomes taxable. In fact, in case of FDRs, interest is taxable on accrual basis on year on year basis.
Therefore, interest would be taxable only from that year in which you becomes resident and not during last 4 years when He was Non Resident.
It may be noted that during the period of RNOR, any income earned overseas is exempted for period of 2 years, however, as per FEMA rules as mentioned above, once an NRI becomes Resident, his NRE FD account is treated as Resident FD account and accordingly, any interest earned in such account would be taxable in India. Therefore, RNOR status will not give any immunity to taxability of NRE FDs once they are recategorized into Resident FDs.
It is not responsibility of bankers to close NRE FD, NRIs have to inform the banker about his status and close the NRE FD or continue it as Resident FDs as doing otherwise, would lead to huge penalty in FEMA also.
Thus, taxability of interest on NRE deposit is an important concept which shall be taken into consideration at the time of NRI Tax return filing in India.