Section 10(4B)-Income from Interest on Savings Certificates to Non-Resident

Section 10(4B) of the Income Tax Act, 1961 in India provides an exemption for interest income earned by a non-resident Indian (NRI) or a person who is not ordinarily resident on certain savings certificates issued by the Central Government. This provision encourages NRIs to invest in specified savings instruments while ensuring that such income is not taxed in India.

Provisions of Section 10(4B)

1. Exemption:

• • Interest income earned by an individual who is a non-resident Indian or not ordinarily resident on savings certificates issued by the Central Government before June 1, 2002, is exempt from income tax.

2. Conditions:

• • The individual must be a non-resident Indian as defined under the Foreign Exchange Management Act (FEMA) or a person who is not ordinarily resident under the Income Tax Act.
  • The savings certificates must have been subscribed in convertible foreign exchange (i.e., remitted from outside India in foreign currency or transferred from an NRE/FCNR account).
  • The certificates must be notified by the Central Government for the purpose of this exemption.
  • The exemption applies only to interest income and not to other forms of income, such as capital gains on the sale or redemption of these certificates.

3. Key Clarification:

• • This exemption primarily applies to savings certificates issued before June 1, 2002, as newer schemes may not qualify unless specifically notified.

Eligible Savings Certificates

The Central Government has historically notified specific savings certificates for this exemption, such as:

• National Savings Certificates (NSC) (e.g., NSC VI or VII Issue, if subscribed in convertible foreign exchange).
• Other savings certificates issued before June 1, 2002, and notified for this purpose.

Note: Post-June 1, 2002, the issuance of such certificates for NRIs in convertible foreign exchange has been largely discontinued or replaced by other schemes. Therefore, the applicability of Section 10(4B) is limited to older certificates still held by NRIs.

Definitions

Non-Resident Indian (NRI):

As per FEMA, an NRI is an Indian citizen or a person of Indian origin residing outside India for employment, business, or other purposes for an indefinite period.

Not Ordinarily Resident:

An individual who is either a non-resident in 9 out of the preceding 10 years, has stayed in India for 729 days or less in the preceding 7 years, or meets specific income conditions for Indian citizens/PIOs (as per Section 6 of the Income Tax Act).

Convertible Foreign Exchange:

Funds remitted from abroad in foreign currency (e.g., USD, GBP) or withdrawn from an NRE/FCNR account.

Example of Section 10(4B)

Scenario:

• Mr. Rahul, an NRI living in the UK, subscribed to National Savings Certificates (NSC VI Issue) in 2001 using funds remitted from his NRE Account (convertible foreign exchange).
• In FY 2024-25, he earns ₹50,000 as interest on these certificates.
• Tax Treatment:
  • The ₹50,000 interest income is fully exempt under Section 10(4B), provided Mr. Rahul remains an NRI or not ordinarily resident and the certificates were notified by the Central Government.
  • If Mr. Rahul redeems the certificates and earns a capital gain, the gain is not exempt and may be taxable under the head “Capital Gains.”

Another Scenario:

• Ms. Neha, an Indian citizen who became a resident in FY 2024-25, holds similar NSCs subscribed in 2000 in convertible foreign exchange.
• The interest earned (e.g., ₹30,000) in FY 2024-25 is not exempt under Section 10(4B) because she is now a resident and no longer qualifies for the exemption. The interest will be taxable under the head “Income from Other Sources.”