NRI taxation: Residential status rules are different for exchange control, income tax laws
The rules for determination of residential status under the exchange control law are different from those under the income tax law.
I am an NRI since April 2014 as per income tax rules, as I stay in India for less than 182 days during each financial year. I plan to invest a large sum of money in the NRE fixed deposit with Indian bank here for 5 years. I will be permanently shifting to India by 31 March 2020, after which I will be a resident Indian as per income tax rules. What would the tax treatment on interest incomes be like after this?
— Name withheld on request
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 exchange control law, when a person leaves India 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”.
NRE accounts need to be designated as “resident” accounts or the funds held in these may be transferred to “Resident Foreign Currency (RFC)” accounts, at the option of the account holder, 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.
In your case, the interest income from NRE accounts will be tax-exempt in India till you are “person resident outside India”, as per exchange control law. Once you relocate to India permanently, you may qualify as “person resident in India” under exchange control law and you will be required to designate NRE accounts as ‘resident’ or RFC accounts.
The taxability of interest income once you qualify as “person resident in India” under exchange control law will be: (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 exempt in India if 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. Assuming the deposit in NRE bank account has been funded from funds outside India on which tax in India, if any, has been duly paid or exemption properly claimed, there will be no taxability on transfer of such amount to other bank accounts. Only the interest income will be taxable in India.
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Sonu Iyer is tax partner and people advisory services leader, EY India.
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