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I am a regular reader of the Hindu BusinessLine for the past eight years. My husband has been in France for the past three years and will move back to India in November 2020 to take up a job in India. He will be a resident and ordinary resident for FY20-21. Also, as per India-France DTAA (Double Taxation Avoidance), he will qualify as a France resident for April-October 2020. He has some NRE FDs (maturing in March 2021) and an NRE savings account.
Interest received on the NRE savings account at the quarters ending June and September 2020 while he was in France: Will it be taxable in India even if tax on it is paid in France?
On NRE FD, what is the tax treatment on interest? Is tax to be paid in India on interest accrued from November 2020 to March 2021 provided that interest accrued from April 2020 till October 2020 is offered to tax in France)?
Nidhi
As per the provisions of Section 10(4)(ii) of the Income Tax Act, interest earned on balance standing to the credit of a Non-Resident External (NRE) account is exempt from tax in the hands of an individual who qualifies as a ‘person resident outside India’, as per provisions of the Foreign Exchange Management Act, 1999 (FEMA).
As per Section 2 of FEMA, an individual who has gone abroad for the purpose of taking up employment outside India is considered to be a person resident outside India (PROI) till he/she stays outside India for such purpose. Also, an individual whose physical stay in India during the preceding financial year (FY2019-20 — April 2019-March 2020) does not exceed 182 days shall qualify to be a PROI.
Considering that your husband has been working outside India and presuming that he has not stayed in India for more than 182 days during FY2019-20, he would be qualifying as a PROI. Accordingly, in relation to your first query, interest earned on the NRE savings account shall be exempt from tax for the quarters ending June and September 2020.
Further, in relation to the second query, a very conservative view is that the interest on an NRE FD is taxable. As per the literal reading of the section, interest is considered to be tax-free on money/balance standing to the credit of an individual’s account. Accordingly, a position is generally taken that such interest earned is exempt. Further, practically speaking, to the best of my knowledge, this issue has not been litigated/questioned by the tax authorities.
Hence, the interest earned till October 2020 (ie, the period your husband qualifies as PROI) shall be exempt from tax, and any subsequent interests is taxable (ie, November 2020 and onwards, since he starts his employment in India and shall qualify to be a person resident in India (PRI)).
I understand that your husband qualifies as a resident of France for April 2020 to October 2020 and presume that he shall qualify as non-resident of France effective November 2020. Further, I presume that he shall not be taxable on interest incomes in France effective November 2020.
Accordingly, interest income on the NRE FD and the NRE savings account shall be taxable in India for the period he qualifies as a PRI as per FEMA.
Further, interest incomes shall be taxable on accrual/time basis, which is to be consistently followed as a method of taxation in tax returns.
The writer is a practising chartered accountant
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