The Hindu Business Line : NRI deposits?

While non-resident Indians (NRIs) would like to make deposits in Indian banks at reasonable rates of interest, such interest suffers tax in India. But the rate of tax to be applied varies, as Part II of the First Schedule to the Finance Act prescribes various rates for different types of incomes earned by an NRI. Investment income is taxed at 20 per cent, interest received from government or any other Indian concern on debts is taxed at 20 per cent, and other income of the NRI at 30 per cent.

Rate for TDS

The tax rate for tax deduction at source (TDS) purposes was the subject matter of interpretation in a recent Authority for Advance Ruling (AAR) decision.

Ravi Narayanan left India in April 2007 and was working in Saudi Arabia. He had spent more than 182 days outside India and become a non-resident individual for the assessment year 2008-09. He wanted to open an Non-Resident Ordinary (NRO) deposit account with banks in India with the help of remittances from Saudi Arabia.

Investment income is defined in Section 115C of Chapter XIIA of the Income-Tax Act, 1961. Such income is taxed at 20 per cent. This is laid down in Section 115E(i). HDFC Bank, where he wanted to make the deposits, took the stand that it will not be the investment income but will be of the type of other income to be taxed at 30 per cent. That is the rate prescribed under Part II-1(b)(i)(K) of the First Schedule to the Finance Act. Narayanan applied to the AAR for a decision on the question of the tax rate to be adopted in respect of the income from deposits in Indian banks.

If it is treated as investment income, it will be taxed at 20 per cent. Else, the rate will be 30 per cent. Chapter XIIA lays down special provisions relating to certain incomes of non-residents. While Section 115C defines various terms, Section 115E happens to be the charging section.

According to this Section, the NRI's investment income shall be charged at 20 per cent. The NRI is defined in Section 115C to be a citizen of India or a person of Indian origin who is not a resident. Section 115C defines `investment income' as income derived from a foreign exchange asset.

Forex asset

A foreign exchange asset means any `specified asset' acquired or purchased or subscribed to in `convertible' foreign exchange. `Convertible foreign exchange' means a foreign exchange which is treated as convertible foreign exchange by the RBI for purposes of the Foreign Exchange Management Act, 1999.

Narayanan wanted to open a bank account with convertible foreign exchange. He did not name the currency in which he wanted to open the account. Section 115C(f) lays down the criteria for treating a deposit as a `specified asset'. Banking companies are regulated by the Banking Regulation Act, 1949 and the Companies Act, 1956. Section 616 of the Companies Act explicitly makes the Companies Act applicable to banking companies insofar as the provisions are not inconsistent with the provisions of the Banking Companies Act, 1949.

The AAR pointed out that a deposit made in a banking company which is not a private company would be regarded as a `specified asset' within the meaning of Section 115C(f).

The Foreign Exchange Management (Deposit) Regulations 2000 specifies the features of the NRO account. The balance in the NRO account cannot be remitted outside India without the approval of the RBI.

The RBI in its Press Release No. 387 of September 18, 2003, declared that current income from the NRO account is freely repatriable. The principle amount can be repatriated only up to one million dollars per year.

Repatriation issue

The AAR pointed out that the question whether such repatriation is permitted or not did not arise. Sections 115C, 115D and 115E did not require repatriation as a requirement for considering a bank deposit as a foreign exchange asset.

The Revenue's sole objection to the applicability of the special provision was based on the ground of non-repatriability of the NRO deposit. Section 115C nowhere says that the asset acquired by convertible foreign exchange should be repatriable.

The AAR concluded that the NRO deposit should be treated as a foreign exchange asset and the interest income arising from it would be investment income.

As the interest income in question will be in the nature of investment income, Clause 1(b) i(A) of Part II of the First Schedule of the Finance Act will be attracted. The interest income from bank deposits should be taxed at 20 per cent and not 30 per cent. TDS will also be at 20 per cent.

This is a big boost for NRIs desiring to make deposits in Indian banks. Complicated provisions of the law stand clarified for the benefit of NRIs.

(The author is a former Chief Commissioner of Income-Tax.)

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