Do NRIs have to pay tax on interest earned in NRE, FCNR and NRO accounts? Know the rules

NRE, NRO and FCNR accounts are designed to help non-resident Indians manage income earned abroad, maintain funds in India and hold foreign currency deposits, respectively. While all three are popular banking options for NRIs, they serve different purposes, hence, comes with different tax rules.

FCNR deposits have been making headlines recently after the government unveiled a special foreign-currency deposit window for NRIs. Under the scheme announced in June, non-resident Indians can place leveraged and unlevered deposits with Indian banks in foreign currency while the Reserve Bank of India (RBI) takes the hedging risk. This facility is aimed at attracting overseas funds and will remain available until the end of September.

Meanwhile, NRE accounts are meant for parking foreign earnings in Indian currency, which can be used by your family living in India or other such purposes. At the same time, NRO accounts are used to hold Indian-source earnings.

Do you pay tax on NRE, NRO and FCNR accounts?

The tax treatment of interest earned by NRIs depends on the type of account in which the deposit is held.

NRE and FCNR accounts generally enjoy tax exemption in India, while interest earned on NRO accounts is taxable, according to a report by Cleartax.

Here’s what you need to know:

• Interest on Non-Resident Ordinary (NRO) accounts: It is taxable in India.
• Interest on Non- Resident External (NRE) accounts: It is tax-free in India (subject to applicable conditions).
• Interest on Foreign Currency Non-Resident (FCNR) accounts: It is tax-free in India (subject to applicable conditions).

Tax rate on interest income from NRO account

Any earning received through an NRO account is taxable at 30 % plus applicable surcharge and cess. Though there is an NRO taxation implication, you can avoid paying tax twice, thanks to the DTAA Agreement.

Double Taxation Avoidance Agreement (DTAA) is a scheme signed by India with 90 countries wherein you can claim tax credits while filing taxes in your country of residence (if applicable). Under DTAA, as an NRI, you can earn tax credits for tax paid in India which is against your tax liability in the country you reside in.

To avail this benefits, you need to submit a few documents, such as:

• Tax residency certificate that is issued by your country of residence
• Self-declaration format to your chartered account (CA) to deduct the tax at source in India.

How to determine residential status of an NRI?

Before knowing your tax liability, you must check your residential status. The Indian income tax law is based solely on residential status, which is calculated by counting the number of days spent in the country.

Under Section 6(1) of the Income Tax Act, a foreign citizen becomes a “Resident” if they meet either of these conditions:

• They stay in India for 182 days or more during the financial year (1 April to 31 March)
• They stay in India for 60 days or more in the current financial year and have spent 365 days or more in India across the preceding four financial years.

For individuals, residential status is further classified into Resident-Ordinarily Resident and Resident but not Ordinarily Resident