I returned to India about a year ago and don’t plan to go abroad again for work. I have a non-resident (external) or NRE account. I want to invest money lying in it in fixed deposits. Will the investment be taxed, or only the maturity amount?
Under the India Income-tax law, interest income from NRE accounts (savings and fixed deposits) earned by an individual is exempt from tax in India, provided the individual qualifies as a “person resident outside India" under the exchange control law. The rules for determination of residential status under the exchange control law are different from those under the income tax law.
Under the exchange control law, when a person leaves India for another country for the purpose of employment or for carrying on business or for any other purpose indicating his intention to stay outside India for an uncertain period, he may be considered as a “person resident outside India". Further, when a person is returning to India permanently, he may be considered as a “person resident in India".
Further, NRE accounts are required to be designated as “resident" accounts or the funds held in these accounts may be transferred to “Resident Foreign Currency (RFC)" accounts, immediately upon the return of the account holder to India for taking up employment or for carrying on business or for any other purposes indicating his intention to stay in India for an uncertain period. Accordingly, you are required to designate the NRE accounts as “resident" or RFC accounts.
For you, the taxability of interest income will be as follows: i) Interest income from NRE accounts will be taxable in India; ii) Interest income from “resident" accounts will be taxable in India; iii) Interest income from RFC accounts will be tax-exempt in India provided you qualify as non resident or resident but not ordinarily resident in India under the income tax law. Else, it will be taxable in India.
Interest income from savings bank account is eligible for deduction from taxable interest income up to ₹ 10,000 (effective financial year 2018-19— ₹ 50,000 for senior citizens aged 60 years or more for both interest income on savings account and FDs).
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Sonu Iyer is tax partner and people advisory services leader, EY India.