Interest earned from corp bonds is taxable, irrespective of residential status

Is income from corporate bonds taxable? The bonds were bought from a non-resident (external) or NRE account. Also, is there any cap on income earned through interest for NRIs?

—Name withheld on request

Under the income tax law, interest income from NRE accounts (savings and fixed deposits) earned by an individual is exempt from income 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 exchange control law are different from those under income tax law.

However, interest income from corporate bonds is taxable in India, irrespective of the residential status of the income earner. Tax would be deducted by the payer (i.e. the company whose bonds you hold) at source. TDS (tax deducted at source) on interest income from corporate bonds is normally at 30% (plus applicable surcharge and education cess) if you qualify as an NRI.

You will be required to file an India income tax return and pay taxes in India only if your total taxable income exceeds ₹2.5 lakh. If your taxable income is below the maximum amount, you may file a tax return to claim refund of any excess tax deducted on the income.

I am an NRI settled in Canada for the last two years. I had no income in FY19 but had a home loan which I finished repaying in October 2018. Will I get any deduction under Section 24 for payment of interest? Am I eligible for any deduction under Section 80C for the principal amount paid? Also, I pay the premiums for my LIC policy through my NRE-NRO account. Will I get any of these deductions?

—Shaija

Under the income tax law, deduction for interest payable on home loan may be claimed if:

(a) The house property is self-occupied; (b) home loan has been taken on or after 1 April 1999; (c) home loan has been taken for acquisition and construction of house property; (d) acquisition and construction is completed within five years from the end of the financial year in which the loan was taken; (e) interest certificate is available from the bank.

If all the above conditions are satisfied, you may claim deduction for interest payable on home loan under Section 24 up to ₹2 lakh. As you do not have any other sources of income, you may file income tax return (in ITR-2) to carry forward the loss of ₹2 lakh up to eight years to set off against future rental income.

Deductions under Section 80C are available against taxable income. As you do not have any source of taxable income, the deduction cannot be claimed under Section 80C.

Sonu Iyer is tax partner and people advisory services leader, EY India. Queries at mintmoney@livemint.com