Recently, I received a query from Ramesh (name changed), an Indian citizen shortly moving to UK for a long term assignment. He has till now invested some good amount fixed deposits in India from which he is earning regular interest income of say Rs. 5 lacs every year. Now, his query was
- Is the FD interest taxable under the Indian tax law even after he becomes a NRI?
- Will the TDS be deducted on the interest? If yes, how much?
- Can he save tax on the the interest income?
- How to show the income in the Indian tax returns?
- Assuming he becomes a resident as per UK tax law, does he need to pay tax at both places? Is there a relief under DTAA in such a case?
First steps while moving abroad
So, in such cases, after moving to UK or even shortly before leaving India (preferable), the first thing that Ramesh will have to do is to re-designate his bank accounts and fixed deposits to non-resident accounts. Since the source of funds for the FD is Indian income, he will have to re-designate it as an NRO fixed deposit.
For my detailed article in Moneycontrol on this point, check: Planning to become NRI? Here’s a financial checklist for you
Is the FD interest income taxable under Indian income tax law after becoming NRI?
As per Section 9(1)(v)(b) of the Income Tax Act, the said income is deemed to accrue or arise in India, and such an income is taxable to NRI.
Thus, speaking of the case in hand, interest income from NRO FD, is TAXABLE for Ramesh India as “income from other sources”. TDS is liable to be deducted on the FD but here, since Ramesh has become an NRI (we’re assuming that he is in India for less than 182 days in the previous year), in such a case the bank will deduct TDS @ 30% on the said amount as required under Section 195 of Income Tax Act.
How to save tax on this interest income?
In such a case, Ramesh can explore investing in avenues as specified in Chapter VIA of Indian Income Tax Act, to claim a deduction. Under Section 80C, you can claim a maxium deduction of Rs. 1.50 lacs. Under Section 80D, Rs. 25,000 and so on. Note that some of the investment options like PPF, etc. eligible for deduction for Section 80C is not available to a NRI. However, options like NPS, Equity linked savings scheme (ELSS) of mutual funds, and others are good options that one can evaluate and invest, to reduce the taxable income. Note that this being a fixed deposit, deduction u/s 80TTA of Rs. 10,000 will not be available to Ramesh.
Does he need to file tax return?
In case Ramesh’s total taxable income is more than Rs. 2.5 lacs (assuming he is less than 60 years old), there is a requirement to file the return. Which return to file will depend on the exact sources of income of Ramesh in that particular previous year. As regards whatever tax has been deducted by the bank, it can be claimed under as TDS credit section in the return.
Does he need to pay tax on this income in UK as well? If yes, how can he save double taxation?
First, we need to ascertain whether Ramesh qualifies as a resident of UK or not. See this link for complete information. As per the UK tax law, you qualify as a resident of UK if you pass the place of stay test of 183 days. Note that the financial year under UK law is April 6-April 5.
If you do actually qualify as a resident, you can check the India – UK Double Tax Avoidance treaty (DTAA) (all such treaties are available on www.incometaxindia.gov.in). In this case, in most likelihood, you may be spared from paying tax in UK. Also, if there is a lower rate of tax/TDS, you can ask the bank in India, where you hold the NRO FD to deduct TDS at a lower rate. Note that in such a case, you will have to get a tax residency certificate from UK authorities (see this link) and submit to a concerned bank in India
If there is no provision for exemption from tax in UK, you’ll have to pay tax in UK & under Section 91 of Income Tax Act, you can claim a deduction of tax paid in UK, from the Indian tax liability.
A twist: Income from interest was Rs. 1.5 lac & till now, Ramesh had provided Form 15G. Can he continue doing so and pay zero tax?
No. Once Ramesh becomes an NRI, he cannot any more provide Form 15G. Section 197A of Income Tax Act only allows residents to provide Form 15G/H & claim non-deduction of tax. Yes, Ramesh can apply for a lower rate of tax under Section 197 to the concerned assessing officer (AO), who shall give a certificate after evaluating the facts of the case. However, it is a time consuming procedure as there is no set time limit for the AO to issue the certificate. A better option can be to pay the tax, file the return & claim refund. This also ensures that there is a continuity of filing tax returns for the NRI in India.
Hope this article has helped you understand some tax planning avenues to save tax on your interest income in India.
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