Section 10(4) of the Income Tax Act, 1961 in India provides an exemption for certain types of interest income earned by non-residents or individuals who are not ordinarily resident in India. This section aims to encourage foreign exchange inflows and provide tax relief on specific interest earnings from designated accounts or investments.
Provisions of Section 10(4)
Section 10(4) has two sub-clauses, each dealing with different types of exempt interest income:
Section 10(4)(i):
- Exemption:
- Interest earned by a non-resident on bonds or securities notified by the Central Government, including any premium on redemption of such bonds.
- Conditions:
- The bonds or securities must be specifically notified by the Central Government for this exemption.
- The recipient must be a non-resident as defined under the Income Tax Act.
- The interest must be payable in foreign currency, and the bonds/securities are typically linked to foreign exchange remittances.
- Example:
- John, a non-resident living in the USA, invests in India Development Bonds (notified by the Central Government) issued in foreign currency. The interest of ₹50,000 earned on these bonds and the premium of ₹10,000 received on redemption are exempt from tax under Section 10(4)(i).
Section 10(4)(ii):
- Exemption:
- Interest earned by a non-resident or a person not ordinarily resident on deposits in a Non-Resident (External) Account (NRE Account) maintained with a bank in India.
- Conditions:
- The account must be an NRE Account as per the Foreign Exchange Management Act (FEMA) regulations.
- The interest must be credited to the NRE Account of a non-resident or a person not ordinarily resident.
- The exemption applies only to interest earned, not to other income from the account.
- The residential status of the individual must be non-resident or not ordinarily resident as per Section 6 of the Income Tax Act.
Note: For individuals who become resident in India, the exemption ceases, and interest on the NRE Account becomes taxable.
- Example:
- Priya, a non-resident Indian (NRI) living in Dubai, maintains an NRE Account with a bank in India. She earns ₹1,00,000 as interest on her NRE Account in FY 2024-25. This interest is fully exempt from tax under Section 10(4)(ii) as long as she remains a non-resident.
Key Definitions
- Non-Resident: An individual who does not meet the conditions of being a resident under Section 6 of the Income Tax Act (e.g., stays in India for less than 182 days in a financial year or meets other non-residency criteria).
- Not Ordinarily Resident: An individual who is either a non-resident in 9 out of the preceding 10 years or has stayed in India for 729 days or less in the preceding 7 years, or a citizen of India/PIO with specific income conditions (as per Finance Act amendments).
- NRE Account: A Non-Resident External Account is a bank account maintained by NRIs in India, where funds are held in Indian Rupees but are fully repatriable (principal and interest) in foreign currency.
Examples of Section 10(4) Application
Section 10(4)(i) – Bonds/Securities:
- Singh, a non-resident living in Canada, purchases Foreign Currency Non-Resident (FCNR) Bonds notified by the Central Government. In FY 2024-25, he earns ₹75,000 as interest and receives ₹25,000 as a redemption premium. Both amounts are exempt from tax in India under Section 10(4)(i).
- If Mr. Singh becomes a resident in India, this exemption will not apply, and the interest may become taxable unless covered by other provisions.
Section 10(4)(ii) – NRE Account:
- Anita, an Indian citizen working in Singapore (non-resident for tax purposes), maintains an NRE Account in India. She earns ₹2,50,000 as interest on her NRE Fixed Deposit in FY 2024-25. This interest is exempt under Section 10(4)(ii).
- In the next financial year, Ms. Anita returns to India and becomes a resident. The interest earned on her NRE Account after her change in residential status becomes taxable under the head “Income from Other Sources.”
