In this video, Abhinav is sharing applicable tax provisions for Indian NRE account interest for US-based NRI
Video transcript (note that auto transcription can contain some errors)
Hello and welcome. This is Abhinav, and I welcome you. In this video, I’m sharing information on income received in, nonresident external accounts. Right? So is it taxable in India?
Now the general rule of, NRE accounts in India is that if you are a nonresident, any income that you earn, any income that you, have in the, NRE account in terms of any credits in the NRE account or, any interest in the NRE account are tax free, completely tax free as per the Indian income tax flow. That is the general rule that people hold that any money that I have in my NRE account is tax free. Right? But there are there are some other angles to it, so that is what I want to discuss. Now important thing to understand is that though the income in the NRE account is tax free and, the interest is also tax free, whatever you earn from the NRE account, however, there is a provision in the income tax act that any income which is directly credited to a bank account in India now understand, NRE account, though it’s a nonresident a bank account for a nonresident Indians, still it’s an Indian bank account.
So the tax provision is that any income directly credited to a bank account in India is taxable in India, and it is irrespective of the residential status of the person. So understand this, if you are a non resident, understood that your foreign incomes are not taxable in India. However, if any income that you earn outside India and you transfer it to a Indian bank account, it directly hits an Indian bank account. That means, for example, you are working in the US and you have, like, given the Indian bank account, to the employer. Right?
And that employer credits the amount to the Indian bank account. It may be NRE, NRO, whichever account. And that particular credit, since it’s a direct credit to the Indian bank account, it will be taxable That that income will be taxable in India. Right? So that is a very important provision that people miss.
Right? So since NRE is an Indian account, if you earn income outside India, transfer directly to an NRE account, Indian government can tax in India. Now understand the difference. Transferring the income directly to an NRE account may make it taxable in India however if you take the money in a foreign bank account like a US Bank account and from there you remit the income to the NRE bank account then it will not be taxed It’s a settled principle of law that the remittance is never taxable. It’s basically if the income is directly credited in an Indian bank account then it is taxable.
So fundamentally speaking yes NRE account is totally tax free. However, if the income is directly credited if the income now it should be an income. If it is not an income, it’s just a remittance, it’s not. But if the if it’s an income, for example, salary income or any, earnings from business that you are transferring, then it it can be taxed in India. One more important thing is that deposits of more than 10 lakhs in an RE account need to be reported.
So there are there is a complete list of, significant financial transactions that the bank needs to report it to the income tax department. So 10 lakhs and above any amount that is credited that is deposited in your NRE, NRO, Savings Bank, Residence Bank, whichever accounts, they will be reported to the Indian tax authorities. Now reporting to the Indian tax authorities doesn’t mean that it becomes taxable. It’s just that there is a kind of heightened sense of, you know, the income tax department will be getting these details, and they may question. Right they may question for example if they get the details they may kind of inquire that you know why this amount is credited see understand one thing it’s a non resident account however it’s an Indian account the Indian tax authorities are fully justified in asking the source of the funds where from this money is there, right, because ultimately it’s not that see, Indian tax department or Indian tax law doesn’t say that any money that you earn in NRE account, Indian tax authorities will never question that.
Right? No. That is never the thing. Right? It’s not like so if you want that, then there are other jurisdictions which do not question whatever the funds are there, but, no, it doesn’t happen in India.
They are fully authorized, and, they have the right to check and ask if at all your return gets selected in a scrutiny. For example, there are lot of high value deposits in your NRE account, so you need to have the documentation in place that the income was earned in India. The income was credited out of India. It is just being remitted back to India to the NRE account. Right?
So that that kind of a preparation you need to have. Now when it is not taxable, there are 2 situations. 1, if it is not in the nature of income. For example, if you transfer the sub so it’s like a remittance or second, it’s a it’s a remittance or it’s a kind of gift to a relative, which is basically not taxable as per the Indian tax law, then it is not taxable. 2nd is where the income belongs to a seafarer.
So I remember in 2015, 2016, there are there was a few judgments. So, basically, these seafarers, what they do, they don’t have a foreign bank account. Right? They have the NRE account, and they transfer the money or the earnings they have in in their earnings of foreign, operations. They, transfer it to the NRE account.
There were certain judgments, which held that the income that is transferred to the NRE account they directly transfer to the NRE account. So those judgments said that they will be they will be taxable, And there was a huge uproar. I remember at that time, I had even written an article on this on my website, and that article kind of became viral. A lot of in the seafarer community, a lot of people read that article. And because that was a practical challenge at that time, because there was a lot of confusion in the seafarer community what to do.
And then there was this circular that came, circular number 3/ 2017, where the CBDT clarified that only in respect to seafarers. They only this circular is only for the seafarers. Seafarers, if they credit any amount to the, Indian NRE account directly, that will not be taxable in India. So that kind of an exemption that is there available is only for the seafarers. It is not available for the other people.
Right? So then in those two cases, it is not taxable, but in other cases, it may be taxable. Right? Okay. So the right approach, as I said, first, always, never directly receive if you are a non resident as for the Indian tax law never receive the income in India directly ensure first of all if you are even receiving that it should not be the nature of income but always first receive the income in a bank account outside India and then transfer it to an NRE.
Yes. Then you can definitely transfer to a NRE account in India. No problem. Okay. And important thing, you can continue to maintain bank account outside India after as for FEMA.
So, for example, so, for example, what happens is that you return back to India. You can still maintain a bank account in US or maybe UAE. There is no prohibition. FEMA allows you Indian FEMA regulations allow you to maintain bank account outside. So if you have, like, for example, you are returning NRI from US, you can still maintain the bank account.
If you have kind of US investments your 4 0 401 ks or your you know stock investments brokerage accounts are there in US always always have the have the invest have a bank account in US keep a bank account active in US receive whatever the credit is in that bank account, and then remedy to the to Indian bank account rather than remitting directly to the Indian bank account. Right? Okay. If Indian tax authorities try to tax any credits in NRE, then you can check the DTA provisions. Right?
So so now think of a situation where there is an income which is directly credited in the NRE account. Indian tax department is well within its rights to question at tax the income because the income is directly received in India irrespective of your residential status, it is taxable in India, then if you are a tax resident of, say, US, right, you have to get taxes in some other country. Right? If you are not a tax resident of US or some other country, then you cannot claim DTA benefit. If you’re a tax resident of US, you can check the DTA provisions between India and US for that particular income, and then you can claim an exemption.
Now for claiming the exemption, you will if you if you claim an exemption, as per the DTAA, then you will need a tax residency certificate, in that country in US, and and and I’ll make a separate video on how to get a tax residence residency certificate, TRC, from the IRS. I’ll make a separate video on that. Right? So then you can request a TRC, claim the DTA, state the exact article or provision where you are claiming a credit, and that you can claim. Now disclose the income remedy to NRE in Schedule EI.
See, this is not like a must, but I always suggest, you know, as a best so first, best practice for nonresident. If you are a nonresident, even if your income is below the exemption limit what is the exemption limit? It’s 3 lakhs under the new tax regime in India right now as I’m speaking. Even if the income if you even if your income is below the tax exemption limit in India, you should file a tax return in India. Right?
It’s always advisable. Just it mean helps maintain continuity. It avoids kind of, you know, tax inquiries that you have not filed the return. Right? If you hold a pair in India, might as well file a tax return in India, just costs a few 1,000 rupees, but it will give you peace of mind.
Now when you file a tax return in India and you have incomes credited to the NRE account, you might as well just put those incomes in Schedule EI. Right? Schedule EI is basically exempt income. Exempt income is basically which are incomes which are not taxable. Right?
So what it does is that later on, the income tax department cannot levy a concealment penalty. For example, they want to kind of levy a penalty on you that you did not kind of inform us that you get so so they decide, okay, the income was directly credited in a Indian bank account, and you should have paid tax. The assessing officer will not be able to levy a concealment penalty to you because you have at least declared that income in schedule e I. You have a reason to say that, okay. I was I was not aware of this provision that, income will be because it’s still a gray area.
Right? But at least I declared the income in schedule e I. Right? So the concealment penalty, which is much more than a normal penalty, that they cannot levy. Right?
So this is something that you can explore. Go in schedule EI for Exempt Income, just disclose in Schedule EI. And you can mention that incomes earned outside India. Right? Okay.
Have sufficient documentation that so for, like, at least for the 6 years. So, generally, the income tax department in India can go back 6 years, 3 years in normal cases, and 3 more years if, like, the incomes are, like, you know, they suspect that it is the income which escapes assessment or, not. So they can go back at least for, I will say, even not for 6 years, just keep it for 10 years. Right? Have your sufficient documentation.
That means your employment contract, your w two. Right? Your, in tax returns in whatever, to IRS that you have, you know, made the tax payment. Right? All that documentation just, you know, have something like a folder wise.
Like, for example, calendar year 2023, 2022, 2021, 2020. Right? So tax payments in US, that kind of a folder for US, you can have, and then you have can also have an India folder. So have your kind of set sufficient documentation in place, because if the in if the inquiry is made, then you can have that ready. You don’t have to kind of look at your emails and, you know, then you don’t frantically search for those places.
You have the information in your folder. Right? Oh, okay. Then, NRE account interest, as I said see, NRE account interest is nontaxable as per, Indian tax law. Very clear.
Specific exemption is there. But if you are a you like a US resident, it will be taxable in your host country. So don’t be under the impression that it’s a total tax free income. No. It will be taxable in the host country, which wherever you are.
So in US, it will be taxable as interest income. Also, the NRE account will need to be reported. For example, if you’re a US resident, then in the f bar and 8938, you need to disclose that, those, those accounts and NRE account, in your f bar you need to file to the FinCEN. 8938 you need to file as along with your tax return. So that care you need to take.
So that is it. I hope this, video was useful, give you some perspective. If you have any questions, do feel free to share in the comment section. Thank you so much for watching this video. Thank you so much.