Is NRE FD interest taxable?

 Non-resident Indians usually rely on Non-Resident External or NRE Accounts to park their foreign earnings in India. These accounts allow NRIs to transfer a portion of their overseas income to their home country while providing a great avenue for investments as Fixed Deposits. NRE FD is an extremely popular investment tool among NRIs due to their tax-free status.

You can open it in foreign earnings if you have an NRE Account in the same bank. They fetch you higher returns than resident accounts in India, with fully and freely repatriable interest and principal amounts.

Is the interest taxable?

According to the Indian tax laws, NRIs are liable to pay income tax in the country only on that income accrued in India. Since the NRE Account holds income earned overseas, it remains completely tax-free in India. It means that both interests earned on the NRE Fixed Deposit and Savings Account are not taxable as per the provisions of Section 10(4)(1) of the Tax Act, 1961.

FEMA guidelines

The primary eligibility criteria to maintain NRE FD Account and earn tax-free interest income is that you should qualify as an NRI under the Foreign Exchange Management Act. It guides whether you can invest in an asset or not. For instance, you can open an NRE Savings Account only if you qualify for it as per FEMA.

A person can be considered a ‘resident outside India’ if their stay in India was for less than 183 days during the preceding financial year. NRIs permanently settled or residing out of India continue to be treated the same under FEMA regardless of the duration of their stay in India.

When does the account attract taxes?

As FEMA considers returning NRIs as resident Indians from the first day, they should discontinue their NRE Accounts. You must change it to a resident account or transfer the funds to the Resident Foreign Currency Account immediately upon your return to India for an uncertain period.

You enjoy tax-free interest income on them only till you qualify as a resident but not ordinarily resident for up to three years to help you shift assets from abroad to India without attracting huge taxes.

Availing tax exemption

When you open an NRI FD Account in India, you need not file income tax returns if your Indian earnings consist of only the tax-free income and TDS deducted. You file ITR only when the total income you earn in India is higher than the maximum amount of INR 2.5 lakh exempt from tax.

Those planning to invest in NRO FD should remember that the interest income earned on these accounts is not tax-free. NRO Deposits hold rates in Indian currency and interest rates applicable to these vary between banks. Repatriation of principal investment is not offered but interest earned can get transferred to a foreign account.