Tax Query: Interest From NRE FD Account Not Taxable for an NRI

Mr Ram is a Non-Resident Indian (NRI) living in Singapore. Currently, he has a Non-Resident External (NRE) account with an Indian bank. He wants to open a fixed deposit and is confused whether such deposit will be taxable. What will happen when he returns to India and become a resident again?

Under income tax laws, any interest received by an individual from NRE accounts is exempt from income tax in India, provided that the individual qualifies as a ‘person resident outside India’ under the exchange control law. You need to know that the provisions determining the residential status under exchange control law are different from the income tax law. 

According to the exchange control law, when an individual leaves India for the purpose of employment, for establishing a business, or for any other purpose indicating his intention to stay outside India for an uncertain period, he will be considered as a ‘person resident outside India’. In addition, when such an individual returns to India permanently, he may be considered as a ‘person resident in India’. Therefore, if Mr Ram opens an FD with an NRE account, the interest income will be exempt from income tax only. This is possible only if he qualifies as a ‘person resident outside India’. 

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Further, NRE accounts are designated as resident accounts. The funds held in such accounts may be transferred to Resident Foreign Currency (RFC) accounts immediately when the account holder returns to India permanently. 

Similarly, when he returns to India, he will be required to designate the NRE account as ‘Resident’ or transfer it to RFC account and, then, the interest earned on the same will be taxable in India. However, he can claim a deduction of up to Rs 50,000 under Section 80TTB from the interest income earned from FDs, provided he qualifies as a senior resident of India (more than 60 years of age).

For any clarifications/feedback on the topic, please contact the writer at komal.chawla@cleartax.in.