How India taxes interest income of NRI children

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When Indian origin kids move abroad and become Non-Resident Indians (NRIs) for tax purposes in India, their income earned in India—most notably the interest on bank accounts—comes under the scrutiny of Indian tax authorities. For the majority of families, there exists a common question: how is interest income arising on Indian bank accounts of NRI children being taxed? Everything depends on the type of account, the residency of the child, and whether the income is clubbed with that of the parent. Bank account type is significant

In India, residents' and non-residents' bank accounts are differentiated. Once the child is an NRI, the regular resident savings account must be converted into Non-Resident Ordinary (NRO) or Non-Resident External (NRE) account.

Interest on NRO accounts in India is deductible from taxes. The interest both in fixed deposits and savings would be included under this head. As opposed to this, interest on NRE or FCNR account is tax-free in India provided the account holder is an NRI according to the Income Tax Act.

Interest on NRO account is treated as income arising in India and subject to flat Tax Deducted at Source (TDS) of 30% subject to applicable surcharge and cess. The bank deducts it before the same is credited to the account. The tax liability can actually turn out to be lower depending on the overall income of the child and tax regulations in the country where they are residing.

But if the NRI child is a minor (under 18 years), Indian taxation norms introduce an added complexity. The income of a minor is under clubbing provisions usually clubbed with the income of the richer parent, except where the income accrues from the minor's own manual work or special skills. For most cases, an NRI minor's interest income from a bank would be added to the parent's taxable income in India and taxed appropriately.

As an NRI, you can escape double taxation by taking benefit of Double Taxation Avoidance Agreements (DTAAs) between India and foreign nations. In case the NRI child is already paying tax in his or her country of origin as well, he or she can claim credit of tax paid in India. To take advantage of the DTAA, one must submit documents like a Tax Residency Certificate (TRC), Form 10F, and a statement to the bank in India.

Though the child receives income only in terms of interest in India, it will be brought to tax in their Indian return (if it needs to be so) or in the parent's return under clubbing of income. Otherwise, there may be penalties or enquiry by the Income Tax Department.

Interest earned by NRI children on accounts in Indian banks is not automatically tax-free. Though NRE interest is exempt, NRO interest is completely taxable in India and can also be aggregated with that of the parent if the child is a minor. To comply and pay no unnecessary taxes, the guardians and parents must know the laws regarding residency, account type, and tax treaty benefits before taking any fiscal step.