Taxability of interest received in NRE Account under Income Tax Act, 1961

The general query by Non resident Indians is that whether if a person, initial of Indian Origin but presently a permanent resident of a foreign countryand having stayed in India for more than 182 days, would his interest income in Non Resident External (NRE) accounts be exempt from Income Tax under section 10(4) of the Income Tax Act?

Basic conditions for an account to be converted as NRE or not are that the stay in India during the financial year is 182 days or more, or stay in India during the financial year is 60 days or more and in the 4 years immediately preceding the FY, it is 365 days or more

As per the provisions of Income Tax Act, 1961, the Interest earned on NRE rupee account (savings or fixed deposit) is exempt from tax, provided the person qualifies as a ‘person resident outside India’ under FEMA. Now to understand the provisions a bit better in detail, unless the person, who is residing outside India, returns to join an employment or carrying on of any business that indicates his intention to stay in India for indefinite period, comes back to the country for indefinite period, his income would be exempted from Income tax. As per the provisions of section 10(4) of the Income Tax Act, 1961, if the person qualifies as ‘person resident outside India’ under FEMA, then the interest received from an NRE account will be eligible for exemption.

Criteria for being classified as a non-resident Indian (NRI).- Now one question that come in the minds of persons having gone abroad for jobs, is that if he has gone for job under L5 Visa and has actually not worked in USA, would his income be exempt. The answer is that the status of being NRI or not is judged on factor of his being present in India or not and not on the basis of number of days he worked outside India.

In the instant case, as in the first year of stay on L5 visa in the US, he has spent more than 182 days out of India and the stay is continuous as on date, he is entitled to be called an NRI. His being on L5 visa will not affect his status.

Requirement of changing Bank Account Status- The requirement of changing the status of the bank account is governed under the exchange control law and not under Income Tax Act, therefore, such persons would be obliged to convert their regular saving bank account in to an non-resident ordinary (NRO) account under the tax rules.

Basic conditions to be remembered are that the stay in India during the financial year is 182 days or more, or stay in India during the financial year is 60 days or more and in the 4 years immediately preceding the FY, it is 365 days or more.

Once these conditions are fulfilled, it is responsibility of the individual to notify the banker of the change in the residential status for necessary re-designation of bank accounts.