For a Returning Non-Resident India, what is the income tax implication for the interest that is earned on the NRO/NRE Account, RFC and FCNR deposits?

For a Returning Non-Resident India, what is the income tax implication for the interest that is earned on the NRO/NRE Account, RFC, and FCNR deposits?

Individuals move across borders for various reasons such as for career opportunities, higher education or for business expansion, etc. If you are an Indian residing outside India (non-resident Indian) and planning to come back to your homeland, you need to consider various aspects such as regulatory aspects, impact on personal finance and tax implications, etc. Your plan of moving back to India needs to be well-thought-out in every aspect. When it comes to financial aspects, you need to be in compliance with the Foreign Exchange Management Act (FEMA) and the Income Tax Act, 1961. Though there are various aspects to worry about or to plan about, let’s get focused on the tax aspect. 

As a non-resident Indian (NRI), you would be maintaining various accounts with the banks - Non-Resident Ordinary (NRO) account, Non-Resident External (NRE) account, Resident Foreign Currency (RFC) account and Foreign Currency Non-Resident (FCNR) account. When you opt to change your status from non-resident to resident but not ordinarily resident (RNOR), you would think about the impact of status change on the tax liability on interest income earned from these accounts. Let’s take a detailed look on this aspect.

Tax liability on interest earned on NRE, RFC and FCNR deposits

The definition of residential status for non-resident is different under Foreign Exchange Management Act (FEMA) and the Income Tax Act, 1961. Definition as per FEMA is what matters while making an investment in India. However, how the income from particular investment needs to be taxed is based on the provisions of the Income Tax Act, 1961. Before we understand the tax liability on interest income for returning NRI, let’s take a look at the definition of resident status under FEMA and the Income Tax Act.

Under FEMA, the intention to stay in India is the main factor to determine the residential status. An individual is a person resident in India if his stay in India exceeds 182 days in the previous FY and he has been in India for work purpose or with a purpose of staying India for indefinite tenure.

On the other hand, the Income Tax Act mathematically decides the resident status. As per the Income Tax Act, an individual is said to be resident, if any of the below conditions are satisfied

• A person is in India for 182 days in the financial year; or
• A person is in India for 365 days in four preceding financial years and 60 days in the current financial year. 

However, if you are leaving India for employment purposes or as a member of a crew of Indian merchant ship or if you are a person of Indian origin visiting India, 60 days in the second condition is replaced by 182 days.

If you are a non-resident returning to India, you can opt for ‘Resident and Not Ordinarily Resident (RNOR)’ status. You are an RNOR, any of the following conditions need to be satisfied.

• You have been an NRI for 9 out of 10 years preceding the current financial year; or
• You have been in India for not more than 729 days during 7 previous years preceding the current financial year; or
• You are an Indian citizen and not a tax-resident in any other country and your Indian incomes exceeds INR 15 lakhs; or
• You are an Indian citizen or person of Indian origin and your Indian income exceeds INR 15 lakhs and your stay in India for the previous year ranges from 120 days to 181 days

For returning NRIs, the tax liability of income would be based on the tax residential status in India and the nature of income.

Let’s assume that you have relocated to India and intend to stay for a longer period, then here are the tax implications on income from various accounts that you hold

Tax implication on interest earned on NRE account

As long as your tax status is non-resident Indian (NRI), the interest earned on an NRE account is exempt from income tax in India. Once you return to India for good, you are required to intimate your banker to re-designate your NRE account to resident foreign currency account. After the account is re-designated, the interest income earned becomes taxable. You may continue to hold an NRE account even after the status change only if you have the permission from Reserve Bank of India (RBI) to do so. Though you enjoy RNOR status for a few years, income earned by you in India would be taxable.

Tax implication on interest earned on RFC account

Interest income earned from your RFC account shall be exempt from tax till you hold Non-resident Indian status or Resident and Not Ordinarily Resident (RNOR) status as per the provisions of Income Tax Act, 1961. Once your tax status changes to the ordinary resident, interest from an RFC account would be taxable.

Tax implication on interest earned on FCNR account

Interest income earned from your FCNR deposits shall be exempt from tax till you hold Non-resident Indian status or Resident and Not Ordinarily Resident (RNOR) status as per the provisions of Income Tax Act, 1961. You can hold FCNR deposits till the maturity. But, the deposit is required to be converted to resident fixed deposit without any changes in the promised rate of interest. You need to intimate your banker within 30 days of your return to India (If you intend to stay in India for a longer period or permanently) to re-designate the deposit status. Once your tax status changes to the ordinary resident, interest from this FCNR deposit would become taxable.

Considering the tax implications and other guidelines are extremely important for non-resident Indians relocating to their home country. While calculating the tax liability, you need to consider your residential status with the conditions applicable as per the provisions of the Income Tax Act, 1961. The treatment of income also depends on the type of account that you hold as per the provisions of the Foreign Exchange Management Act, 1999 (FEMA).