Tax on Returning NRI NRE Fixed Deposits

Thank you Mr. Pritam Sharma for such detailed information. more  

Brij Gupta ji, thank you very much for sharing your views based on your own first-hand experience as well as understanding of my issues. My case seems to be similar to yours. My current status is that of RNOR and I do not have any foreign investments or foreign income now. However I do have NRE Fixed deposits. After interacting with some of the banks and CAs, I tend to agree with your observation that the ‘law is not very clear about tax status on NRE deposits once the person becomes RNOR’ and also that ‘most of the banks or CAs do not have complete knowledge of exact interpretation of rules and laws in respect of the same’. One of the banks has now told me that they are seeking clarifications on this from the legal department in their head office. I find it surprising that banks deducted TDS from your RFC account while you were still RNOR. You also mentioned that SBI continued NRE deposits till maturity and no TDS was deducted. How is it that different banks are interpreting the same rules and laws differently? Anyways your contribution has been very useful for me and my sincere appreciation once again. more  

Thanks Pritam ji for finding my remarks useful to you. Hope Mr Gulati will read my experience. more  

Gupta Ji, thanks for sharing your experience. Its been a good learning for us. more  

Mr Suresh Gulati, although you liked the post but you didn't tick "Helpful". Any I have bad news for you. When your RNOR status is over your FD will be treated as resident FD and is taxable. Please go through the following information: Who is RNOR (Resident but not Ordinarily Resident)? RNOR status is essentially a transition phase from being non-resident to being a resident (ROR). As per Section 6 of the Income Tax Act, there can be two types of residents. Resident and Ordinarily Resident (ROR) Resident but not Ordinarily Resident (RNOR) You are RNOR if you satisfy any of the following two conditions: You have been a non-resident (NRI) in 9 out of 10 previous years preceding that year. You have, during the previous 7 years preceding that year, been in India for a period of 729 days or less. So, essentially, you first determine whether you are a resident or non-resident. If you are a resident, you must determine whether you are ROR or RNOR. FEMA has only two classifications: Resident and Non-Resident (Resident outside India). Income Tax Act has three classifications: ROR, RNOR and NRI. Does RNOR status affect taxation? Very much. RNOR are almost treated like NRIs when it comes to taxation. As per Section 10(15)(iv)(fa) of the Income Tax Act, interest of foreign currency deposits in Indian Banks is exempt for non-residents and RNOR. Hence, interest on FCNR deposits will continue to be exempt from tax as long as you remain RNOR. Similarly, interest earned on RFC account will be exempt from income tax as long as you are RNOR. Since RNOR get favorable tax treatment (as compared to ROR), you can time your return in a way that you stay RNOR for as long as possible. Illustration: RNOR Status If you are returning after being NRI for 5 continuous years or less, you become a resident (ROR) immediately (as per Income Tax Act). If you are returning to India after being NRI for 6 continuous years, you can become RNOR for one year. Subsequently, you become ROR. If you are returning to India after being NRI for say 20 continuous years, you can become RNOR for two years. Subsequently, you become ROR. In extreme cases, if you are returning after being NRI for 5 years or more (and didn’t visit India during those years) and return to India after April 2, you can be RNOR for maximum three years. Please understand there are specific numbers involved in determining residential status. This is best understood with the help of an example. You have been staying abroad for 20 years and didn’t come to visit India even once during those 20 years. You return to India on June 1, 2015. You would obviously qualify as NRI for the last 10 years from FY2006 to FY2015. FY2016 (ending March 31, 2016): Since you have been in India for more than 182 days (305 days), you qualify as a Resident for FY2016. But which type of resident? You were non-resident for all 10 previous years (FY2006 to FY2015) preceding that year (FY2016). Hence, you are RNOR. FY2017 (ending March 31, 2017): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2017. You were non-resident for 9 out of 10 previous years (FY2007 to FY2016) preceding that year (FY2017). Hence, you are RNOR. FY2018 (ending March 31, 2018): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2018. But which type of resident? You were non-resident for 8 out of 10 previous years (FY2008 to FY2017) preceding that year (FY2018). The condition is not met. However, there is an additional condition. During 7 previous years (FY2011 to FY2017), you were in India for 670 days (305 in FY2016 + 365 in FY2017), which is less than 729 days. Hence, you are RNOR. FY2019 (ending March 31, 2019): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2019. But which type of resident? You were non-resident for 7 out of 10 previous years (FY2009 to FY2018) preceding that year (FY2019). The condition is not met. However, there is an additional condition. During 7 previous years (FY2012 to FY2018), you were in India for 1,035 days (305 in FY2016 + 365 in FY2017 + 365 in FY2018), which is more than 729 days. Hence, you are ROR. You can be RNOR for a maximum of three years. Do through this article in Mint for more clarity on RNOR status. For more on determining residential status of an individual, you can refer to Section 6 of the Income Tax Act. As I understand, the moment you return to India permanently, NRE FD no longer exists. You continue it as a Resident FD only (though the same rate will apply). So, if you are continuing as resident FD, it goes only to ordinary savings account on maturity. You can’t be resident for savings account or NRI for fixed deposit. Yes, you will have to pay income tax in India. You will get all the tax benefits that residents get. Your non-resident accounts will have to be redesignated as resident accounts. You will face operational problems later on if you have informed the bank. It would be difficult for the bank to transfer the maturity proceeds as you would not have NRE account. more