Hemant Mishra/Mint
Hemant Mishra/Mint

Taxation of FD interest income depends on residential status

The taxability in India depends on the residential status of a person

I am a British passport holder and have a status of overseas citizen of India (or person of Indian origin). I have two non-resident external (NRE) accounts and one non-resident ordinary (NRO) account with Bank of Baroda in India. I am planning to return with an intention to settle here. I have already transferred 33 lakh (£34,000) to my NRE account. I want to open fixed deposits (FD) with this money. I want to know about taxation on the interest income I will be earning. I got to know that all the interest income from these FDs will be exempt from tax for seven years, from the date I return to India. Is this correct?

—Niket Shah

The taxability in India depends on the residential status of a person, which is determined based on the number of days stayed in India in each financial year (FY). A person is said to be a resident of India in case she has spent either 182 days or more during the FY; or has spent 365 days or more in India during the four preceding years and is in India for a period of 60 days or more during the year. If none of the conditions are satisfied, a person would qualify to be a non-resident Indian (NRI). Further, resident but not ordinarily resident (RNOR) is a residential status wherein a person is said to be an RNOR if she qualifies to be a resident for the relevant year and is NRI in India in nine out of 10 previous years or, has during the seven previous years, been in India for 729 days or less.

Depending on your residential status in the year of your return, the taxability of the interest income earned from FDs held by you in your NRE account would have to be determined. In case you continue to be an NRI during the relevant FY, then the interest income arising from NRE account would be exempt in India. If your residential status changes to that of a resident, your NRE account would have to be re-designated as resident foreign currency (RFC) account (subject to satisfaction of eligibility criteria) and the interest income arising from deposits held in the RFC account would be exempt until you are an RNOR in India.

In any other case, the interest income earned by you will be chargeable to tax in India at the slab rates applicable to you. Separately, in the case of a person of Indian origin or a citizen of India who was ordinarily resident in a foreign country and who, on leaving such country, has returned to India with the intention of permanently residing in India, is not subject to wealth tax on any money and value of assets brought into India and the value of the assets acquired out of such moneys within one year preceding the date of return and at any time thereafter. The exemption applies for a period of seven successive assessment years commencing with the assessment year following the date on which such person returned to India. You may note that the exemption is provided from a wealth tax perspective and does not extend to income tax.

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