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, depending upon your residential status under the exchange control law, if the interest income from the NRE account is exempt from income tax in India, you may report the same in the income tax return under Schedule EI (Exempt Income) as exempt “interest income".
I’m a resident Indian since 2008 till date, filing my annual tax returns every year as a resident Indian. Prior to 2008, I had NRI status and was residing and working in the UAE. During this period, I was exempt from paying any taxes in India on my overseas income. I was also not paying any tax in the UAE as per local rules. In 2007, I had made a certain investment in the UAE, which was from my salary earned as an expatriate working in the UAE, and as a non-resident Indian (NRI). The investment will be maturing in September 2021 and I wish to transfer the returns in international currency to my resident Indian bank account in India at the prevalent exchange rate. Please advise if any declaration has to be made in this regard in the IT return of this year. Once the amount is repatriated to my resident Indian bank account, what will be my tax liability on this sum during the filing of next year’s return?
—Name withheld on request
Assuming you qualify as “resident and ordinarily resident" (ROR) in India, you are liable to tax on worldwide income in India and you are required to report all foreign assets in the India income tax return. Also, the income earned from such foreign assets during the relevant financial year along with the nature of income and head of income under which such income has been offered to tax in the India income tax return needs to be reported in relation to each foreign asset.
The foreign assets to be reported include foreign bank accounts, financial interests, immovable property, accounts in which the individual has signing authority, trusts, any other capital asset held by the individual outside India. One has to be careful in reporting foreign assets/income in the income tax return. Any omission or inaccurate particulars may invite additional taxes, interest and penal consequences under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
The income earned from the investment in the UAE (i.e. in excess of amount invested) will be taxable in India in hands of ROR irrespective of whether the amount is repatriated to India. The taxability (including the year of taxation) of such income will depend on the nature of income (interest or capital gains or any other).
Sonu Iyer is tax partner and people advisory services leader, EY India. Queries at email@example.com