I am a non-resident Indian (NRI) living in Singapore. I have a non-resident external (NRE) account with an Indian bank. If I open a fixed deposit (FD), will that be taxable? What happens if I return to India and become a resident again?
Under the 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 determining residential status under the exchange control law are different from income tax law.
Under the 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 returns to India permanently, he may be considered as a “person resident in India". Accordingly, if you open an FD under an NRE account now, interest income will be tax exempt if you qualify as a “person resident outside India".
However, 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 an uncertain period.
Accordingly, when you return to India, you will be required to designate the NRE accounts as “resident" or transfer it to RFC accounts and the interest income earned on the same will be taxable in India. Deduction under Section 80TTB up to ₹50,000 may be claimed on interest income from FDs only if an individual qualifies as a resident senior citizen (60 years or more) in India.
I am an NRI and want to transfer or gift the maturing amount from an FD to my daughter who lives in India. Will the amount be taxable?
Under the income tax law, if any sum exceeding ₹50,000 is received by an individual without consideration from any person, the same is taxable in his or her hands. However, gifts from a relative are not liable to tax in the hands of the recipient or the person giving the gift.
The term “relative" is defined to include spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendant or descendant, any lineal ascendant or descendant of the spouse, and others. Therefore, the funds received upon maturity of the FD gifted to your daughter in India will not be liable to tax.
Sonu Iyer is tax partner and people advisory services leader, EY India