Clarification regarding exemption of interest on Non-Resident (External) Accounts in case of joint account holders

1. Section 10(4 )(ii) of the Income-tax Act, 1961 provides for exemption from income-tax in the case of an individual, who is a person resident outside India as defined in clause (q) of section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973), on any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the said Act and the rules made thereunder.

2. The issue, whether the interest income on moneys standing to the credit in Non-Resident (External) Accounts in joint names is exempt from income-tax under section 10(4)( ii) of the Income-tax Act, has been raised before the Board as some Assessing Officers are not treating such interest income as exempt from income-tax.  The controversy has arisen because of the use of the word “individual” in section 10(4)( ii), inserted by the Direct Tax Laws (Amendment) Act 1987 with effect from 1-4-1989, which was not there in the earlier section 10(4A).  It is argued that the interest on Non-Resident (External) Accounts in joint names, which was exempt from tax prior to 1-4-1989 because of the use of the word “person”, shall not be exempt now because such joint account holders constitute a separate entity,viz., ‘Association of Persons’ and cannot be said to be individuals.

3. The matter has been examined and it is clarified that the joint holders of the Non-Resident (External) Accounts do not constitute an association of persons by merely having these accounts in joint names.  The benefit of exemption under section 10(4)(ii ) of the Income-tax Act will be available to such joint account holders, subject to fulfilment of other conditions contained in that section by each of the individual joint account holders.

Circular : No. 592, dated 4-2-1991.

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January 2021