Interest on Non-resident (External) Account [Section 10(4)]

Exempted Incomes-Section 10(4)

Interest on Non-resident (External) Account (NRE) is exempt from income tax in India under Section 10(4)(ii) of the Income Tax Act, 1961. This exemption is available to both individuals and Hindu Undivided Families (HUFs) who are non-residents of India.

An NRE account is a type of bank account that can be opened by non-residents of India to deposit foreign currency. The interest earned on NRE accounts is exempt from income tax in India, regardless of whether the account holder is a resident of India for the purposes of the Foreign Exchange Management Act, 1999 (FEMA).

Conditions :

To be eligible for the exemption under Section 10(4)(ii), the following conditions must be met:

  • The account holder must be a non-resident of India.
  • The account must be an NRE account.
  • The interest must be earned on the foreign currency deposited in the account.

If all of the above conditions are met, then the interest earned on the NRE account will be exempt from income tax in India.

The exemption under Section 10(4)(ii) is a significant benefit for non-residents of India who have NRE accounts. It helps to reduce their tax burden and encourages them to invest in India.

Examples:

Here are some examples of cases where the exemption under Section 10(4)(ii) will be available:

  1. An Indian citizen who lives and works in the United States opens an NRE account in India to deposit his US dollar savings. The interest earned on the NRE account will be exempt from income tax in India.
  2. A Hindu Undivided Family (HUF) which is registered as a non-resident entity opens an NRE account in India to deposit its foreign currency savings. The interest earned on the NRE account will be exempt from income tax in India.
  3. An NRI opens an NRE account with a bank in India and deposits funds that have been earned overseas. He/she earns interest on the NRE account. The interest earned is exempt from income tax in India.
  4. An NRI opens an NRE account with a bank in India and deposits funds that have been transferred from his/her NRO account. He/she earns interest on the NRE account. The interest earned is exempt from income tax in India.
  5. An NRI opens an NRE account with a bank in India and deposits funds that have been received as a gift from his/her relatives in India. He/she earns interest on the NRE account. The interest earned is exempt from income tax in India.
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It is important to note that the exemption under Section 10(4)(ii) is only available for interest earned on NRE accounts. Interest earned on other types of bank accounts, such as Non-Resident Ordinary (NRO) accounts and Resident Ordinary (RO) accounts, is taxable in India.

Documentation and Compliance

In order to avail the tax exemption on NRE account interest, NRIs need to ensure they are compliant with the necessary documentation and reporting requirements. They must provide the required documents, such as a valid passport, visa, and proof of NRI status, to open an NRE account.

Additionally, NRIs need to report their NRE account details and interest income in their income tax returns. Even though the interest income is exempt from tax, it is still necessary to disclose the income in the tax return filing.

Other Considerations

While the tax treatment of interest on NRE accounts is favorable for NRIs, there are a few other considerations to keep in mind. NRIs should be aware of the currency conversion rates and any associated charges when transferring funds to and from their NRE accounts.

Furthermore, NRIs should also consider the tax implications in their country of residence. While the interest income may be tax-free in India, it may still be subject to tax in the country where the NRI is a tax resident. NRIs should consult with a tax advisor or professional to understand the tax implications in their specific situation.

Conclusion

The tax treatment of interest on Non-resident (External) Accounts under Section 10(4) of the Income Tax Act provides a significant benefit for NRIs. The tax exemption on NRE account interest allows NRIs to earn tax-free income on their foreign investments in India. However, NRIs need to ensure compliance with documentation and reporting requirements to avail the tax exemption. It is also important to consider other factors such as currency conversion rates and tax implications in the country of residence. Overall, NRE accounts offer an attractive investment option for NRIs looking to earn tax-free returns on their foreign income.

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