Balram Naidu worked in the US for 10 years and returned to India in Oct 2023. He had an offer to join a startup in India. Considering the options, he chose to return back. Balram Naidu had invested his savings from US earnings in NRE deposits with his Bank in India. The NRE deposits will be maturing in a year’s time, Will the interest on NRE deposits be taxable at the time of maturity? Does he need to report these NRE deposits and NRE accounts while filing his ITR in India?

This article deals with:

  • Interest on NRE Deposits
  • Residential Status as per FEMA
  • Intent Vs Duration of stay
  • Change in Bank Account Status
  • Taxation of Interest Earned in NRE Deposits
  • New ITR Forms – New Disclosures

Interest on NRE Deposits – Tax Exemption

As per the Income tax act, interest received from NRE account is exempt from taxes for an individual, till the time the individual qualifies as person resident outside India (PROI) under the provisions of Foreign Exchange Management Act, 1999 (FEMA) or is a person who has been permitted by RBI to maintain the said account.

Residential Status as per FEMA:

Fema recognises individuals as a ‘Person Resident in India (PRII)’ or ‘Person Resident Outside India (PROI)’. If during the previous financial year a person stays for more than 182 days in India, then the person will be treated as resident under Fema; in all other cases he will be treated as non-resident. However, there are some exceptions to this rule.

A person is treated as non-resident with immediate effect even though he has stayed in India for more than 182 days during the relevant previous year if during the current year the person leaves India or stays outside India for employment, for business or vacation or for an uncertain period of stay.

Likewise, when an individual has not stayed in India for more than 182 days during the relevant previous year, but during the current year comes to India or stays in India for any of the three purposes stated above, he/she becomes a resident with immediate effect.

Intent Vs Duration of Stay:

One major distinction between Income Tax and FEMA provisions is that for purpose of Income Tax, purpose of stay (in India or abroad) is not relevant, only duration of stay is relevant.

Hence from FEMA point of view Balram Naidu becomes PRII from the date of his return to India.

Change in Bank Account Status:

As per FEMA, Balram Naidu must redesignate his NRE accounts as resident accounts immediately on return to India to take up employment. Alternatively, the funds held in his NRE accounts may be transferred to the RFC account immediately upon return to India.

Taxation of Interest Earned in NRE Deposits

Subject to the above rules, there is a view that once a person returns to India for employment, and becomes a PRII, the interest exemption under the Income Tax Act may be available only till the time the individual was a PROI and / or is permitted to maintain the said deposit account as per FEMA.

New ITR Forms – New Disclosures

In the new ITR forms, it is obligatory for the taxpayer to disclose all the active bank accounts. As such, all savings and current accounts held by an individual are required to be reported in the “Bank Accounts” section of the ITR form.

In case Balram Naidu holds only NRE time deposits and not a savings/current account, the same would not be required to be reported in this section. However, NRE deposits may need to be reported in Schedule AL under “Financial Assets” if its applicable.

All the incomes from the NRE deposits (even if its exempt) would be required to be reported appropriately in the relevant section of the ITR.

NRI and related tax issues

In spite of shifting base to different geographies, many Indians keep in touch with their roots, tradition, culture and rituals as that has been the way our DNAs are made!

Income tax as a subject by itself undergoes numerous changes every year and it could be quite cumbersome to keep a tab on the innumerable changes. Recent changes to the Income Tax Act changed the way NRIs are taxed in India. With the introduction of the term “deemed resident”, it becomes all the more important to review the residential status every year. The Income Tax law is more stringent now and has more tools to track and tap information to enable effective taxing of the NRIs.

Being an NRI, you have to deal not with one but with at least two country’s tax laws. We understand your needs and can be of tremendous support in keeping tax compliance in India on track. Our NRI services can help you save time and effort, while also minimizing the risk of penalties and legal issues arising from non-compliance with tax laws.

ITR Filing – Why choose us?

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Effective compliance is a key pillar for growing your finances and career/business. Tax compliance in particular could be cumbersome and at times very stressful. We help you to navigate through the maze of changes to tax laws with ease.

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CA Chockalingam K
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