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

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


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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

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

Under the Indian tax laws, residential status is determined on the basis of physical presence of an individual in India during the FY.

If the individual satisfies any of the basic conditions mentioned below then, he would qualify as a resident, otherwise he would be non-resident (NR).

Basic Conditions: Stay in India during the financial year is 182 days or more, or stay in India during the FY is 60 days* or more and in the 4 years immediately preceding the FY, it is 365 days or more.

Do note that the period of 60 days can be extended to 182 days for an Indian citizen, who leaves India in any FY for the purpose of employment outside India.

Therefore, an Indian citizen who leaves India for the purpose of employment, and his stay is less than 182 days in India, will qualify as NR.

A person who went to the US in April 2015 would qualify as an NR for FY16 if: the stay in India is less than 182 days during the period from 1 April 2015 to 31 March 2016; and he left India for the purpose of employment outside India.

Under the exchange control law, an individual present in India for 182 days or less during the preceding FY or a person who has come to stay in India otherwise than the following would qualify as ‘person resident outside India’: for or on taking up employment in India, or for carrying on in India a business or vocation in India, or for any other purpose.

The requirement for re-designation of the bank accounts from a resident account to non-resident bank account is based on the residential status under the exchange control law and not under the income tax law in India.

You are required to notify the bank of the change in the residential status under the exchange control law so that the bank account can be re-designated to the appropriate non-resident account from resident account.

You may contact your respective banker to understand the process for re-designation of the bank account.

I and my brother inherited a house from our father last year. I am an NRI and want to give my share in the house to my brother. Will there be any tax implications for this on my brother or myself?

—Rohit Kandhari

Under the Indian income-tax law, any property received under a Will or by way of inheritance is not taxable in India.

However, income tax is levied on any sum of money, movable property or immovable property received by an individual without consideration (i.e., without a quid pro quo), except gifts received from a relative.

The term ‘relative’ includes: i) spouse, ii) brother or sister; iii) brother or sister of the spouse; iv) brother or sister of either of the parents; v) any lineal ascendant or descendant; vi) any lineal ascendant or descendant of the spouse ; vii) spouse of the person referred to in clauses (ii) to (vi).

Therefore, gift of your share of house to your brother will have no tax implications in India neither for you nor for your brother.

Sonu Iyer is tax partner & people advisory services leader, EY India.

Queries and views at mintmoney@livemint.com.

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