• PAGE ONE
• INDEX
• HOME

Banking tips for NRIs

N. K. Juneja on the different deposit schemes for NRIs and their tax implications

INCOME earned/accrued on deposits and investments made in India by non-resident Indians (NRIs) has been subjected to `complexities'. The interpretation of residential status of a non-resident under the Income-Tax Act, 1961 and the Foreign Excha nge Management Act, 1999 (FEMA) -- effective since June 1, 2000 -- has not been the same. Under the I-T Act, tax on income received or accrued in India is being levied as per residential status of a person. The residential status under the A ct is based on the period of stay in India in a financial year as well as in previous years. As per the I-T Act, the status of a person can be `resident and ordinarily resident', `resident but not ordinarily resident' or `non-resident'.

NRIs, as per FEMA, include a) NRI nationals who have gone outside India for employment/business/vocation or any other purpose which indicates his intention to stay outside India for an uncertain period; and b) persons of Indian origin who are not nationa ls of Pakistan or Bangladesh.

These NRIs are given tax exemption on interest income earned on deposits made with banks under the specially designed schemes, provided the funds are remitted either from outside India through banking channels or from the repatriable funds held in India. Tax exemptions are available for the following deposit schemes: Foreign Currency Non-Resident (Banks) Account -- Section 10(15)(iv fa); Non-Resident (External) Rupee Account -- Section 10(4)(ii); and Non-Resident Non-Repatriable Rupee Deposit -- Section 10(15)(i).

Tax at source on interest paid/credited under Ordinary Non-Resident Rupee Account (NRO) and Non-Resident Special Rupee Account (NR(S)RA) is deductible at a flat rate of 30 per cent under Section 195 (1). Banks have to deduct the tax from interest paid/cr edited and deposit it within seven days in the government account and, an annual return in Form 27 is also to be submitted to the I-T Department. NRIs can save tax deduction in NRO and NR(S)RA accounts by furnishing to the bank, either a `no objection ce rtificate' (NOC) from the I-T Department or a prescribed undertaking (in duplicate) along with a certificate by the chartered accountant other than their employee (AD (MA series) Circular No 21 and CBDT's Circular No 759 dated November 18, 1997).

Whenever NRIs return to India for permanent settlement after one year outside India, they can also have Resident Foreign Currency Account and banks will have to deduct tax at source under Section 194 A on the rupee value (to be determined by applying pre vailing TT buying rate) on the date when interest is paid or credited to the account. After returning to India, the persons having `resident but not ordinarily resident' status can avail tax refund on interest income in Resident Foreign Currency Account as well as Foreign Currency Non Resident (Banks) Account and Non Resident (External) Rupee Account, by furnishing a declaration under Section 115 H in writing along with return of income under Section 139 to the assessing officer (AO) for the assessment year for which he/she is assessable.

This declaration should be to the effect that special provisions of Sections 115 C to 115 H should continue to apply to him/her in relation to the investment income derived from any foreign exchange asset till the transfer/conversion of foreign currency/ NRE accounts takes place into resident accounts finally. Where the NRE account-holder obtains permission from the RBI for continuation of NRE account even after returning to India for permanent settlement, he/she can also claim tax exemption under Sectio n 10(4)(ii).

NRIs are also given certain tax concessions on the income earned on permitted repatriable investments in India and they are being taxed at a flat rate of 20 per cent (10 per cent on interest/dividend or long-term capital gain income on specified bonds/sh ares) irrespective of the amount of income under Sections 115 D to 115 F. These persons have the choice either to utilise the tax benefits at these flat rates by observing Section 115 G stipulations or enjoy the benefits of exemptions/deductions like res ident Indians, by filing return of income under Section 139 of the I-T Act with the relevant AO of the Department before the prescribed dates. Certain tax exemptions/deductions available to resident Indians are not permitted to NRIs such as under Section s 80 DD, 80 U, 88 B, and so on.

All these tax exemptions are available to persons of Indian origin/nationality, and not to overseas corporate bodies of NRIs, foreign nationals and their overseas entities.

NRIs are not governed by the deduction of tax at source under Section 194 A of I-T Act as long as they are non-residents. When these persons return to India for permanent settlement, banks will continue to pay the contracted interest rate on term deposit s till their maturity. After returning to India, if Section 10(15)(iv)(fa) and 115 H exemptions are not used by NRIs, banks should deduct tax at source under Section 194 A wherever applicable (that is, deduction of tax at source from the payment of inter est exceeding Rs 10,000 (revised from Rs 2, 500 since July 1, 1995) on term deposits in a financial year at 10 per cent plus 1 per cent surcharge since financial year 1999-2000 to the resident non-corporate persons].

This tax deduction is applicable on term deposits, including variable deposits held under NRO/NR(S)RA/NRNR/NRE/FCNR schemes (by applying TT buying rate) from the date of return of account holder to India. The recurring deposits are not treated as part of term deposits for the purpose of tax deduction under Section 194 A. This section is applicable to interest paid or credited on October 1, 1991, or thereafter. It has been clarified (CBDT Circular No 256 dated May 29, 1979) that in joint accounts, in the absence of any proof to the contrary, all the joint-account-holders should be treated as payees for the purpose of deduction of tax under Section 194 A unless the person paying the interest on such deposit(s) has definite information about the beneficia l ownership of deposit(s), the interest payable under a joint account should be aggregated with the amount of interest payable to any one of the payees in their separate or independent accounts.

In absence of any information to the contrary, the persons responsible for deducting the tax should aggregate the interest of the joint account with the interest paid on deposit in the individual's account who has higher interest income. In the NRO, NR(S )RA and NRNR accounts only, the resident joint-account-holders are permitted, but the resident persons are not permitted to deposit their own funds in these accounts. Therefore, clubbing of interest amount in these accounts (after conversion to resident accounts) with the interest paid or credited in the accounts of resident joint-account holder(s) should not be done. Bank branches should not postpone deduction of tax till maturity of deposit; and the tax must be deducted on the date interest is paid or credited in the account.

If the bank has credited the interest amount in any interest payable/sundry account, and so on, in place of crediting the interest in the payee's account, it will be taken as credit to the account of the payee even though this credit is not reflected sep arately in the payee's account. Bank branches should deposit the tax within the prescribed time limit of seven days in the government account and file return in Form 26 A by June 30 every year.

As per CBDT Circular No 617 dated November 22, 1997, the account-holder can save deduction of tax by furnishing to the banks (i) Form 15 H, (ii) Form 15 A duly attested by a Member of Parliament/gazetted officer/officer of the bank as indicated in the fo rm, or (iii) NOC issued by the AO of the I-T Department.

NRIs can make use of these tax benefits and enhance their net returns by investing their funds in appropriate schemes. Bankers and other investee organisations permitted by the RBI can also market their deposit schemes/investments by explaining the tax c oncessions to the NRIs in a simplified manner.