Income Tax liability on NRE & NRO Accounts
Introduction:
An NRI (Non-Resident Indian) who is employed outside India and deriving any income abroad is not liable to pay income tax on such income in India because such income is not accrue or deemed to accrue in India. But if any income is derived by such NRI in India, it would be taxable in India. This has the effect that the NRIs ought to pay tax on interest or rental income on the investments made out of the funds brought by them in India.
The Government of India permits NRIs to open rupee accounts in India so that they could repatriate funds from their country of employment to India. NRIs can either open a NRE A/c or NRO A/c with bank to park their earnings which we will discuss in this article.
Who is Non-Resident Indian (NRI)?
According to FEMA, 1999, A Non-Resident Indian (NRI) is a citizen of India who holds an Indian passport and:
- Who resides in India for less than or up to 182 days during the course of preceding financial year OR
- Who has gone out of India or who stays outside India for the purposes of employment OR
- Who has gone out of India or stays outside India for carrying on a business or vocation outside India OR
- Who has gone out of India or who stays outside India for any other purpose indicating his intention to stay outside India for an uncertain period.
Who is a Person of Indian Origin (PIO)?
A “Person of Indian Origin” is a citizen of any country (other than Pakistan or Bangladesh) if:
(a) He or she at any time held an Indian passport or
(b) He or she or either of his parents or grandparents was/ were a citizen of India by virtue of Constitution of India or the Citizenship Act 1955 or
(c) He/ she is a spouse of an Indian citizen or a person referred to in (a) & (b) above.
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Please note that liability to pay tax in India is not dependent on the factors such as citizenship or domicile rather it is determined on the basis of residential status as per section 6 of the Income Tax Act. Further, it should also be noted that the criteria of determining residential status under FEMA and Income Tax Act are also different. Under FEMA, the stay in India or intention to stay in India for any purpose is a predominant factor for being resident in India at a particular point of time whereas under Income Tax Act, the period of stay in India in previous year for specified days determine his residential status for that year. |
Why do NRI need to open an NRE/NRO Account?
According to the FEMA provisions, an NRI cannot keep a savings account in his or her name in India. Therefore, when an Indian citizen goes abroad for employment or business purposes with an intention to stay abroad, he needs to open NRE/NRO account to manage his earnings abroad as well as in India.
What is Non-Resident External (NRE) Account?
The NRE account is an Indian rupee-denominated bank account which can be opened in the form of savings, current, recurring or fixed deposits. The deposit in the NRE A/c is made in foreign currency which is converted into Indian Rupees.
- NRIs can deposit their foreign earnings only in the NRE A/c in foreign currency.
- The amount deposited in NRE A/c along with interest thereon is fully repatriable from India at any time. There are no RBI restrictions on repatriation of funds out of NRE A/c.
- The balances in NRE A/c can be freely transferred to other NRE A/c or NRO A/c.
- The balances in NRE A/c can also be utilized for making any investments like mutual fund or share investments in India.
What is Non-Resident Ordinary (NRO) Account?
An NRO account can be opened by an NRI as saving or current account in India to manage their income earned in India.
- Amount can be deposited in NRO A/c in foreign currency as well as Indian currency.
- An NRI can also transfer funds from his one NRO A/c to another NRO A/c.
- NRO A/c does not allow full repatriation facility. Interest earned on NRO A/c can be repatriated freely but the principal amount can be repatriated only within the prescribed limits.
- An NRI can remit not more than USD 1 million abroad in any financial year from NRO A/c. Such remittance should be supported by an undertaking along with a certificate from Chartered Accountant.
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Both NRE and NRO Account can be jointly opened. NRE A/c can be opened in the joint name of two or more NRIs. Whereas NRO A/c may be held by an NRI jointly with residents also. |
Is interest on NRE Account taxable?
Interest income on the balances standing in NRE Account is exempt from income tax according to section 10(4) of the Income Tax Act. In case NRE account is held in joint names, all joint-holders shall be eligible for exemption subject to fulfillment of conditions prescribed u/s 10(4) of the Income Tax Act. Further, no TDS is required to be deducted in respect of interest on NRE A/c.
According to section 10(4)(ii) of the Income Tax Act:
In the case of an individual, any income by way of interest on moneys standing to his credit in NRE A/c in any bank in India would be exempt provided such individual:
- is a person resident outside India, as defined in FEMA 1999, or
- is a person who has been permitted by the RBI to maintain such account.
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There is a confusion regarding income tax exemption of interest earned on NRE A/c. Interest income on NRE A/c is not always exempted but the exemption is subject to fulfillment of conditions as prescribed in section 10(4)(ii). One of the conditions for availing exemption is that the person should be a person resident outside India (PROI) as per FEMA, 1999.
According to FEMA, a person is considered as “person resident in India”, if:
Suppose, Mr. A who is NRI was working in USA for last 10 years. He is having a NRE A/c in a bank in India. He left the job and comes back to India in F.Y. 2021-22 for employment in India. Thus, as per the FEMA provisions, he will be treated as a “Person resident in India”. In such a scenario, once he qualifies as “person resident in India” as per FEMA, he can not avail the exemption under section 10(4)(ii) of the Act and the interest on NRE A/c earned by him shall be taxable till the time the account is operational. To conclude, interest on NRE A/c is exempt from tax only if a person is treated as “Person resident outside India” as per FEMA or is permitted by RBI to maintain the account. |
Is interest on NRO Account taxable?
Interest earned by any individual on the balances standing in NRO A/c is taxable under Income Tax Act. The bank shall deduct TDS on such interest at 30%. However, an NRI can file its return and claim refund if such interest income is falling within Basic Exemption Limit.
