Is the interest from NRE FD will become Taxable once NRI becomes RONR?

Q & A Forum › Category: Tax Planning › Is the interest from NRE FD will become Taxable once NRI becomes RONR?

rajannakv2000@yahoo.com asked 9 years ago

Dear Mr.Reddy, Happy to find your site which can help many people in solving their problems of finance. Request you to please help me to understand the following. I am an NRI since 2004 & now I am planning to come back India in the month of November-2017 for permanent settlement. I have my NRE FDs for tenures of 5 years & 10 years & now the interest earned from NRE FDs are Tax Free. When I returned to India I will get 2 years RONR status but still my FDs will have maturity period balance. So once I become RONR for 2 years, whether the interest earned during RONR period is Taxable in India or not Taxable. On the otherhand, I read it in some sites that, once I come back to India I should re-designate my NRE account to RFC account. That means all my rupees in NRE account will be converted into foreign currency & will be put into RFC account. I don't want to change NRE account to RFC, because as the time passes, suppose the foreign currency conversion rate may decline & as a result I will receive less amount of rupees than what is converting at the time of opening of RFC account. So if don't change my NRE account to RFC rather I prefer to re-designate as resident-rupee account & want to continue my existing NRE FDs in resident-rupee account if possible & what is the Tax implication for interest earned from resident-rupee account FDs during RONR period. Sorry my question become a bit long. Please help me understand the above. Regards, Rajanna K V

5 Answers

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Sreekanth Staff answered 9 years ago

Dear Rajanna, If you opt for RNOR status and would like to get tax-exemption on NRE deposits then I believe that you need to re-designate NRE accounts to RFC accounts. If you opt for Resident accounts then I believe that interest income is chargeable to tax.

rajannakv2000@yahoo.com replied 9 years ago

Dear Mr.Reddy,
Regarding Taxation on NRE FD interest once NRI becomes RNOR, it is noticed from one of websites that, NRE FDs can be continued as it is upto RNOR status & interest earned during RNOR period is exempt from Tax. Please check this Link for the same, http://savingsfunda.blogspot.com/2015/06/what-happens-to-nrefcnr-nro-account-when-NRI-return-back-India.html
Replies

Javin PaulDecember 3, 2016 at 8:18 PM
Hello @valokv, as longs as you are RNOR (Resident but not Ordinary Resident) after returning to India, your account can remain NRE account and you can enjoy tax free interest on your NRE fixed deposit. Depending upon how long the person has been in Overseas in previous year, he can be an RNOR for 2 to 3 years.

Request you to clarify if you can please,

Rgds
Rajanna

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Sreekanth Staff answered 9 years ago

Dear Rajanna, You may kindly go through below article : Article - 1 "Interest on NRE is FDs is exempt from tax under section 10(4)(ii), provided you are NRI as per FEMA Act and Income tax Act. For RNOR, it is exempt under section 10(15)(iv)(fa), here condition is that you should be allowed to maintain that account under FEMA. In most cases, RNOR person has to covert its NRE account to RFC (Resident Foreign Currency) account to continue to have exemption." You may also kindly check with a CA who is an expert in NRI taxation matters.

rajannakv2000@yahoo.com replied 9 years ago

Dear Mr Reddy,
Thank you very much.

rajannakv2000@yahoo.com replied 9 years ago

Dear Mr.Reddy,
How are you. Regarding NRE FD interest taxable or not during RNOR status I have asked an expert in CAclubInida for which an expert by name Mr.Seetharaman had replied in the below link. As per him NRE FD income is not taxable upto its maturity or even upto the status of RNOR. Pl refer this link.
http://www.caclubindia.com/experts/nre-fd-tax-on-interest-earned-from-nre-fd-during-rnor-status-2563424.asp

he says like below.
My question-Dear Sir, I am an NRI since 2014 & have NRE FDs for tenures of 5/8/10 years. Now I am planning to return India permanently. Even after my return to India my NRE FDs still have the maturity period balance. Now as per IT rules interest earned from NRE FDs is Tax free during NRI status. Now my query is 1.Whether the interest earned from NRE FDs will be Tax free even after my return to India. 2. Whether the interest earned from NRE FDs will be Tax free only upto RNOR status, because I will get RNOR status for a period of two years. 3.Is it necessary to convert my NRE account to resident account & if so, in this case what will happen to my existing NRE FDs whether FDs can continue till maturity. Request your kind assistance in this regard. Rgds Rajanna.
His answer-1 Nre deposit till it’s maturity is exempt even after returning to India. 2 Exempt till maturity. 3 FDs can continue till maturity. NRE account to be converted as resident account.

So I am confused about this issue.

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Sreekanth Staff answered 9 years ago

Dear Rajanna, I have visited the shared links, but he is also informing us that after becoming RI, the interest income is chargeable??" Below are my views : Interest earned on NRE account will be taxable in the year you become a resident in India. On returning to India, please note that apart from re-designating NRE FD as resident FD on return to India, you also have an option to convert the NRE FD into a Resident Foreign Currency (RFC) FD which is denominated in foreign currency. Interest from RFC FD is not taxable in India, till your residential status as per Income Tax Act is that of “Resident and Not Ordinary Resident” (RNOR).

rajannakv2000@yahoo.com replied 9 years ago

Dear Mr.Reddy,
Thank you very much for your reply. Yes the expert from CAclubindia firstly said interest earned from NRE FD is tax free till its maturity, but later when I asked him for any particular clause to support the issue, he again said it will be taxabale.

However what I want to clarify now from your above line is, is the interest earned NRE FD will be Tax Free during NRI status, because if an NRI during his last FY year as NRI, stays outside for only 185 days in a FY & returns to India to spend remaining 180 days of FY in India. In this case he will get NRI status & in this condition the interest earned from NRE FD is Tax free in that FY?

Please try to clarify at your convenient time.
Rgds,

Rajanna

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Sreekanth Staff answered 9 years ago

Dear Rajanna, Even on returning to India, if his/her Residential status is NRI for a particular FY, the interest income on NRE FDs is tax-free. You may kindly go through below articles (Residential status calculator available) : https://www.relakhs.com/residential-status-calculator-nri-taxation/ https://www.relakhs.com/double-taxation-avoidance-agreement/

rajannakv2000@yahoo.com replied 9 years ago

Dear Mr.Reddy,
Thank you very much for your reply. Yes now I am clear that, the interest earned from NRE FD is Tax Free in India as long as the person is an NRI. But, Mr.Reddy I am telling you this IT rules are so much complicated & no one can understand clearly. The thing is when the interest from NRE FDs is Tax Free since the source of funds are from abroad when the person is NRI & at the same time that interest is earning in India no. Similarly why the interest earned from NRE FDs is not Tax Free while the person is a Resident, because even if he becomes Resident then also the original fund was earned from abroad no. On the other hand, it says RNOR are treated as almost like NRIs, if so then why the interest from NRE FDs is not Tax Free during RNOR status. Sorry to take your time what to I am confused about this & thinking that interest will be Tax Free during RNOR I have made many NRE FDs for 10 years & now planning to return permanently.

Sorry to take your valuable time to read my stuff.

Thanks & Regards,
Rajanna.

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Sreekanth Staff answered 9 years ago

Dear Rajanna, Sometimes rules can be illogical! We have to live with them!