CA Chirag Chauhan
According to the Ministry of Overseas Indian Affairs, India has the second largest diaspora in the world. The overseas Indian community estimated at over 25 million is spread across every major region in the world.
A non-resident Indian (NRI) is a citizen of India who holds an Indian passport and has temporarily emigrated to another country for six months or more for employment, residence, education or any other purpose.
A person of Indian origin (PIO) is a person of Indian origin or ancestry who was or whose ancestors were born in India or nations with Indian ancestry but is not a citizen of India and is the citizen of another country. A PIO might have been a citizen of India and subsequently taken the citizenship of another country.
Liability to pay tax in India does not depend on the nationality or domicile of the Tax payer but on his residential status. Residential Status is determined on the basis of physical presence i.e. the number of days of stay in India in any year. For the purposes of the Income Tax Act, “residence in India” requires stay in India of at least 182 days in a calendar year or 365 days spread out over four consecutive years. According to the act, any Indian citizen who does not meet the criteria as a “resident of India” is a non-resident of India and is treated as NRI for paying income tax.
In case of an NRI who is earning salaried income abroad, only income accruing in India or received in India or deemed to accrue in India is taxable in India, unlike in the case of a resident, whose worldwide income is taxable in India. Therefore, for an NRI who earns abroad, it is very important to ensure that her salary is not received directly in India so that it is not taxable in India. In a recent decision by Tribunal, NRI who earns abroad and receives salary directly in India bank account can claim to be not being earned in India. This decision will help many NRI who are traveling abroad in different county and have a bank account in India.
The Government of India has permitted NRIs to open rupee accounts in India in order to repatriate funds from their home countries. Many NRIs maintain a Rupee account in India for repatriate overseas earned money back to India or wants to keep Indian based earnings in India. Basically there are two options available with NRI interested in opening bank account in India – NRE or NRO account.
What is NRE Account and NRO Account ?
A Non-Resident External (NRE) account is a bank account that’s opened by depositing foreign currency at the time of opening a bank account. This currency can be tendered in the form of traveler’s checks or notes.
A Non-Resident Ordinary (NRO) account is the normal bank account opened by an Indian going abroad with the intention of becoming an NRI. An NRI can also open this account by sending remittances from his home country or by transferring funds from his other NRO account.
Both NRE and NRO Account can be jointly opened. In case of NRE in name of two or more Non Residence. However in case of NRO it May be held jointly with residents also. Currency in which NRE and NRO account is denominated is Indian Rupees. The Amount Deposited in NRE account is Repatriable were as amount deposited in NRO account has limits and condition for repatriation like up to USD 1 (one) million per financial year (April-March), for any bonafide purpose after giving undertaking along with a certificate from a chartered accountant.
You can chose NRE account in case you want to maintain Rupee Account or you want a joint account with NRI and want rupees to be freely Repatriable. On other hand if you want to maintain Indian earning in India like rent, income from FDs, dividend, etc, or want to open joint account with resident you may open an NRO account.
Taxation of NRI and TDS applicability of NRO / NRE Account
The interest earned on NRO Account as well as the credit balances in account are taxed under the account holder’s tax bracket in India. The Bank will upfront deduct 30% TDS on interest Income which an NRI can file its return and Claim Refund if he is falling within Basic exemption limit. On the other hand, interest earned on the NRE account is totally exempted from income tax and nor TDS is deducted on it, and the credit balances in the account don’t attract any wealth tax.
Investment in Fix Deposit by NRI – Case Study for NRI in US (United States of America)
An NRI is making Fix Deposit in India by opening an NRE account. Interest rates are very good compared to US and are tax free in India. But is it worth for NRIs in USA? This is because, the interest on NRE FDs are tax free in India but not in USA. Any money earned anywhere in the world is taxable in US if a person is in USA. The only exception is if tax is already paid in that country, NRI can claim credit. Interest Income in USA is not taxable on cash basis. You have to disclose your global income as a part of your tax returns in US, irrespective it is cash or accrual basis.
So what this means is NRE FDs are taxable in USA. And the tax in USA is much higher than that of India. For working NRIs who already have an income in USA, the tax on NRE FD interest will be more than 40%. Instead is it not better to keep these FDs in NRO account and pay 30% TDS?
NRO FDs would deduct TDS @ 30%, but you would have to still pay balance 10% tax in USA (based upon how DTAA works). You can’t avoid USA tax if India has deducted any tax. You have to pay the balance of tax in USA.
Both in case of NRE & NRO you should report your gross Interest in your global tax return in USA. In case of NRE you would not be able to show any tax being deducted and hence would have to pay tax on complete NRE interest in US. For NRO, you could claim the TDS deducted in India against your tax liability on NRO interest For example if your NRO interest was 100 and TDS of Rs. 30 was deducted and net was 70 which was credited in your India account. You should show 100 interest in your US tax statement and lets say if your tax liability is 40 for this 100 interest, then you can claim the 30 deducted in India as tax already paid an pay the balance 10 tax in USA.
To avoid such situation many client would rather not have any resident banking relationship with the respective bank which is holding NRE FDs in India so that they can enjoy tax free interest income. For example invest into NRE FDs with 10 year period, interest being paid out quarterly then got their interest income linked to Equity Mutual Fund SIPs making a capital guarantee and protection vehicle.
Foreign Currency Fluctuations and Inflation Risk
Foreign currency fluctuations are driven by Inflation levels in the countries so one does not necessarily make money by investing in a high inflation country. For Example if Rate of Interest in India is 10% and Inflation is also 10% rupee would be depreciated by 10%. So for an NRI if he wants to again convert his Rupee income to any other currency (for eg US Dollar) he may not earn any income on conversion. At the same time if he is investing in fix deposit in US he will earn 2% to 3% without any currency risk.
The Investment Decision for NRI cannot be a Standard for all. It depends upon mainly the following Factors
Country of Residence
Currency and inflation of Residence country
Currency and inflation in India
Investment in Fix Deposit, Gold, Equity , Real Estate, etc
DTTA with other Country
End use of Investment –Repatriate or not
Filing of income Tax Returns for NRI
NRI has to mandatorily file his Income Tax Return if his total income is more than basic exemption limit of (Rs 200,000 Rs for AY 2013). Any income arising in India like Rent and FD interest are taxable and TDS is liable to be deducted at the time of Receipt.
Most of NRI who has NRO account Fix Deposit a TDS of 30% is deducted from interest income earned on Fixed Deposit. In some cases NRI total Income is less than Basic exemption Limit and they do not file their income tax return. However TDS has been already deducted. Such NRI can file their tax return and Claim Refund from Income Tax Department.
For Example: An NRI of US has Fix deposit in NRO account earning Interest of Rs 200000/- During an Year. The Bank Has Deducted TDS of Rs 60000/- . An NRI can file Income Tax Return in India and Claim Refund.
For any query you can write to Chirag@cachauhan.in . Before making any decisions do consult your Professional / tax advisor. Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability neither for the loss or damage of any kind arising out of information in this document nor for any action taken in reliance there on.