Tax Treatment on NRI/PIO Term Deposits

Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs)  can have bank accounts in India. They can be of three types – NRE, NRO or FCNR accounts. NRE and NRO accounts can either be current, savings, or fixed deposit accounts. The FCNR account is only a term deposit account.

Must ReadIt is not legal for an NRI to hold Resident Saving Account

From an income tax perspective, if a person has stayed in India for 182 days in a calendar year or 365 days spread out over four consecutive years, he/she is considered as ‘resident of Indian and has to file income tax returns else the person is considered as an NRI/PIO for paying income tax. An NRI is a person staying abroad for employment/business. A PIO is a person who has residency in a foreign country apart from Nepal, Bangladesh, Pakistan, Afghanistan, Bhutan or Sri Lanka and has had an Indian passport earlier or has parents/grandparents of Indian origin.

 Tax Treatment on NRI Term Deposits

Tax Treatment on an NRE Account

An NRI can open a NRE current, savings or term deposit account. The interest earned here is tax-free in India. The principal and the interest amounts have to be fully repatriated to the individual. (but there can be taxation in residing country – talk to your CA)

Tax Treatment on NRO Account

An NRO account can be opened by NRIs and PIOs. The interest earned is taxable as “income from other sources” in India. The tax rate will be determined by the tax slab that the total income falls under. The bank has to deduct tax at source and then pay the interest amount. If the NRI is a tax resident of the country where he/she lives, a beneficial tax rate can be claimed provided certain conditions of the Double Taxation Avoidance Agreement (DTAA) are fulfilled. Depending on the rate at which the bank has deducted tax at the source, he/she can claim a refund or pay the balance tax as the case may be.

Tax Treatment on FCNR account

FCNR accounts are only for fixed deposits. Both NRIs and PIOs can open an FCNR account but only in certain currencies. The interest earned in this account is tax free and the entire principal and interest amounts have to be paid to the account holder.

If the NRO bank interest is the only source of income in India and no relief is claimed under DTAA, Income tax return (ITR) 1 form can be used. Even if the interest earned on NRE and/or FCNR  accounts are exempt from tax, it has to be disclosed in the ITR to be compliant from disclosure perspective if filing returns in India.

Note: Consult your Tax Advisor before taking any investment call.

This is a Guest article written by Vidya – she is NRI

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{ 4 comments… add one }
  • Shirish February 11, 2015, 5:52 PM

    What is the taxability if during the tenure of FCNR deposit, the person comes back permanently and becomes resident? I know that the FCNR deposit can continue till maturity, but what is the tax treatment for interest earned?

  • NRITK March 8, 2015, 5:09 PM

    I would like to know the retirement investment options for NRIs in India or outside India.

    Appreciate if anyone can put some focus on this.

    Thanks and Regards,

  • syam July 31, 2015, 11:41 AM

    can seafarer become nri when he meets the 183 day criteria?

  • tony November 18, 2016, 8:01 PM

    What is the tax for a person who have worked all his life abroad, but stayed in India off and on. I tried to seek advice for a CA, But was not successful. He says that since i have stayed more then 180 day this year 2015 -2016, there is some complication in calculating tax. Being a person busy earning money, find it so difficult to understand Indian Tax system. If you can help in any way, I would be very grateful, because I only have a 2 more years before retirement, and then I will be back in India for good.

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