Taxability of NRIs / PIOs on Deposits in India
Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs) are allowed to hold bank accounts in India. They can have bank accounts of three types – NRE, NRO or FCNR accounts. NRE and NRO accounts can either be current, savings, or fixed deposit accounts. The FCNR account is only a term deposit account.
From an income tax perspective, if a person has stayed in India for 182 days in a Financial Year (1 April to 31 March) or 60 days in a Financial Year and 365 days spread over four consecutive Financial Years, he/she is considered as ‘resident of India and has to file income tax returns else the person is considered as an NRI for paying income tax.
An NRI is a person staying abroad for employment/business. A PIO is a person who has residency in a foreign country apart from Nepal, Bangladesh, Pakistan, Afghanistan, Bhutan or Sri Lanka and has had an Indian passport earlier or has parents/grandparents of Indian origin.
Tax Treatment on an NRE Account
An NRI can open a NRE current, savings or term deposit account. The interest earned here is tax-free in India. The principal and the interest amounts have to be fully repatriated to the individual. (but there can be tax implications in residing country)
Tax Treatment on NRO Account
An NRO account can be opened by NRIs and PIOs. The interest earned is taxable as “income from other sources” in India. The tax rate will be determined as per the applicable tax slab that the total income falls under. The bank has to deduct tax at source and then pay the interest amount. If the NRI is a tax resident of the country where he/she lives, a beneficial tax rate can be claimed provided applicable conditions of the Double Taxation Avoidance Agreement (DTAA) are fulfilled. Depending on the rate at which the bank has deducted tax at the source, he/she can claim a refund or pay the balance tax as the case may be.
Tax Treatment on FCNR account
FCNR accounts are only for fixed deposits. Both NRIs and PIOs can open an FCNR account but only in certain currencies. The interest earned in this account is tax free and the entire principal and interest amounts have to be paid to the account holder.
If the NRO bank interest is the only source of income in India and no relief is claimed under DTAA, Income tax return (ITR) 1 form can be used. Even if the interest earned on NRE and/or FCNR accounts are exempt from tax, it has to be disclosed in the ITR to be compliant from disclosure perspective if filing returns in India.
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