Taxation Issue of NRI Returning or Coming back to India
PART A
IT Section 10 (iv) (fa). In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included - Interest Payable by a scheduled bank to a non-resident or to a person who is not ordinarily resident within the meaning of sub-section (6)† of section 6 on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India.
Explanation.—For the purposes of this item, the expression "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank;
Analysis of Section 10 (iv) (fa)
For claiming Interest Income Tax Free benefit Following Condition to be fulfilled.
1. Person should be NR/RNOR, means this benefit is available till person remain RNOR
2. Such deposit should be in foreign currency means deposit in INR currency will not be tax free
3. Interest payable by such bank as defined in said act.
IT Section 10 (viii) any income by way of interest received by a non-resident or a person who is not ordinarily resident, in India on a deposit made on or after the 1st day of April, 2005, in an Offshore Banking Unit referred to in clause (u) of section 2 of the Special Economic Zones Act, 2005;
Analysis of Section 10 (viii)
For claiming Interest Income Tax Free benefit Following Condition to be fulfilled.
1. Person should be NR/RNOR, means this benefit is available till person remain RNOR
2. Such deposit should be in in an Offshore Banking Unit referred to in clause (u) of section 2 of the Special Economic Zones Act, 2005
RBI Exchange Manual 13B.3 In terms of Clause 4(ii) of Section 10 of Income-tax Act, 1961, any income from interest on monies standing to the credit of NRE accounts is exempt from income-tax.
IT Section 10 (4) (ii) in the case of an individual, 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 Foreign Exchange Management Act, 1999 (42 of 1999), and the rules made there under :
Provided that such individual is a person resident outside India as defined in clause (q) of section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account ;
Analysis of Section 10 (viii) Section 10 (4) (ii) read with RBI Exchange Manual 13B.3
1. Interest Income is exempt to NR only, who is NR as per FEMA Act 199 or permitted by RBI and not when this NR become R
IT Section 6 about RNOR
RNOR status is essentially a transition phase from being non-resident to being a resident (ROR).
As per Section 6 of the Income Tax Act, there can be two types of residents.
- Resident and Ordinarily Resident (ROR)
- Resident but not Ordinarily Resident (RNOR)
For RNOR if you satisfy any of the following two conditions:
- You have been a non-resident (NRI) in 9 out of 10 previous years preceding that year.
- You have, during the previous 7 years preceding that year, been in India for a period of 729 days or less.
Analysis of Section 6 of RNOR
As per this there is no any blanket period of two year exemption of tax in case of foreign currency deposit account. It all depends that for how much year you are RNOR. For example after returning India, 1st condition will be fulfill which is out of 10 years 9 years is NR and Next Condition 729 days out of 7 year also may be fulfill and there may be possibility that he may be RNOR for 3rd year also hence The RNOR status will be applicable to a person based on his or her length of stay outside India.
PART B
My Write UP Based on My Study and as per understanding of above Provision
An NRI who has returned to India permanently is allowed a reasonable time to inform all the banks about the change in his status but what is reasonable time is not specified in the act. When an NRI returns to India for permanent stay his various NRI accounts are converted into equivalent resident accounts. NRO saving account is converted back to resident saving account while NRE and FCNR account is converted into RFC (Resident Foreign currency) account.
However If you are returning India for good but don't have any NRE or FCNR account but have foreign currency and can go back abroad after some time then you can also open RFC (Resident Foreign currency) account.
After receiving information bank will convert NRE/FCNR/NRO account to Resident Account.
NRE fixed deposits can continue to run till maturity at the contracted rate of interest until you decide not to break them.
After maturity, NRE and FCNR fixed deposit account will be converted to RFC account.
As per Income Tax Act and RBI Guideline 13B interest on NRE account is exempt till person remain as a NR. In case of NRE deposit it will be taxable from date of return and not from date of the conversion to Resident account, if it has not been converted into foreign currency account. Because as per rule when he ceases status of NR interest on NRE account become Taxable.
However as per IT Act Interest on foreign currency account is tax free like RFC/FCNR for RNOR and not Interest on NRE INR account so FCNR and other Foreign currency account will be tax free until NRI is remain as RNOR.
For taking benefit of tax free interest person should remain as RNOR. A blanket period of two year is not a condition, the condition is he should be RNOR for getting tax free benefit and he may get this benefit for 3 years also being a RNOR.
Disclaimer:
This study and write up and not an opinion and is being provided on knowledge sharing basis which I have as per my best of knowledge study and understanding. This documents does not create or establish any advise, direction and/or instruction to anyone to follow as per the said study and writeup. Reader are free to adopt as per their own understanding of their particular case and transaction. This I want to clear that, I will not be personally liable or indemnify to any one, if authority take another view.
The author can also be received pankaj@anpllp.com
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