I have a few fixed deposits (FDs) amounting to ₹30 lakh with HDFC Bank Ltd. I will soon move to the UK and become a non-resident Indian (NRI). I will need this money six to 12 months after I settle and want it transferred in my UK account. What will be my tax liability? How can I avoid it, if possible?
—Name withheld on request
Interest income from FDs in bank accounts in India is taxable in India. However, you may choose whether the interest income should be considered taxable at the time of credit (accrual basis) or at the time of actual payment (cash basis) by the bank.
For example, if you have a fixed deposit for a period of five years, then you may tax the interest income as follows:
a) On a year-on-year basis as per the interest accrued in each financial year; b) In the financial year in which interest is actually received.
Banks normally withhold tax on interest accrual in each financial year on a year-on-year basis. Thus, practically, interest income from fixed deposits is taxed on a year-on-year basis as per the certificates shared by the bank to avoid any mismatch.
In your case, if your interest income has already been taxed in respective prior financial years, then only the residual interest income will be taxable in the financial year in which the fixed deposit is withdrawn.
However, if your interest income has not been taxed in respective prior financial years, then total interest income will be taxable in the financial year in which the FD is withdrawn.
In any of the above scenarios, if your total income is less than ₹2.5 lakh for the relevant financial year, there will no tax liability in India.
I work in Malaysia but I have investments in mutual funds and shares in India and I receive dividend income from them. Is there any tax implication on this?
—Name withheld on request
Dividend income from mutual funds in India is exempt from income-tax in India. Taxability of dividend income from shares in India will depend on your residential status in India.
If you qualify as “resident" of India, dividend income from shares of Indian companies will be exempt from tax in India if the total dividend income is up to ₹10 lakh during the relevant financial year. Dividend income in excess of ₹10 lakh will be taxable at 10% (plus applicable surcharge and education cess).
On the other hand, for non-residents, full dividend income from shares in India is exempt from income tax in India.
Sonu Iyer is tax partner and people advisory services leader, EY India. Queries at firstname.lastname@example.org