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Jan 27, 2012, 04.20 PM IST | Source: Moneycontrol.com

All about taxation on NRI accounts!

There are different types of bank accounts that are used by Non Resident Indians (NRI) and the two most common ones are the Non Resident Ordinary (NRO) and the Non Resident External (NRE) bank account.

All about taxation on NRI accounts!
Arnav Pandya

There are different types of bank accounts that are used by Non Resident Indians (NRI) and the two most common ones are the Non Resident Ordinary (NRO) and the Non Resident External (NRE) bank account.

There are different ways in which the money can be handled in these accounts in terms of the repatriation of the amounts and there is also a tax angle that will have to be considered for the individual non resident when they earn income from these account. With several changes recently with respect to these accounts it is important to take a close look at the position. 

Nature of account

The NRO savings bank account is a rupee account usually consisting of money earned in India before or after becoming a NRI. A specified amount is repatriable abroad from this account for specific purposes. This is the reason why most of the income that is earned in India can be put here. On the other hand the NRE savings bank account is meant for fund that would be repatriated and hence the amount of the contribution to the bank account also comes from outside earnings in foreign exchange.

The principal as well as interest on the account is repatriable. This account is also present in rupees so there is a currency risk that is present at the time of transfer of money. There are two types of accounts where the amounts can be invested and the first one is the savings account mentioned above. Further the investor can also ensure that there are fixed deposits that can be put with the bank so these will offer an additional investment opportunity for the individual Non Resident Indian.

Interest rate changes

One of the major changes that have been witnessed in the account in recent times is that the interest rate on the NRE fixed deposits has been decontrolled. This means that the banks are free to price the deposits as they deem fit and the immediate impact of this has been that the rates have shot up to over 9% in  most cases. This is a significant rise for the investor and they will be able to ensure that there is a good return that they are getting on their investment. While there is this kind of benefit that is present a need is also present to take a careful look at how the taxation will work out.

Tax free

What will come as a bonanza for the non resident investors is the fact that the income earned in the form  of interest from the NRE accounts are tax free in their hands. There is no taxation on the interest that is earned here and for this reason there will also not be any Tax Deducted at Source (TDS) on the income earned here. This is a good thing because the individual will be free to ensure that they are investing what they want into the deposits and there is no tax element that they have to worry about.

This reduces the situation of having to claim back amounts from the government as refunds after filing the tax return. The interest earned  on the  savings bank NRE account  as well as the fixed deposit NRE account will be tax free for the investor.

On the other hand when it comes to the NRO account the amount that is earned here is taxable. So the first thing that the NRI has to plan for is the fact that any income from such accounts will have to be included in the tax working. In many cases the fact that the income is taxable might not be such a major point because the total income earned by the NRI and taxable in India might not be very high so they might not have to pay tax.

However there will be a TDS that is done on the account and hence there could be a situation where the NRI will have to go and get a refund of the amount that they have faced as a deduction from the government. This will be done only when they file a return with the necessary details and the amount will be refunded back to them.

Arnav Pandya can be contacted at arnavpandya@hotmail.com .

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