Tax Implications Of Investing In Nri Fixed Deposits

Are you contemplating on investing in India? Are you sceptical about the tax implications on an NRI? 

The investment opportunities in India are adaptable to suit NRIs and offer them an effortless banking and investment experience. A risk-free option for savings is investing in NRI (Non-Resident Indian) Fixed Deposits.

This article guides you through the types of Fixed Deposits available for NRIs and the tax implications for investing in them. 

An NRI set up an NRE Fixed Deposit (Non-Resident External) or NRO Fixed Deposit (Non-Resident Ordinary).

NRE Fixed Deposit 

An NRE Fixed Deposit account can be set up by an NRI. It could either be in single holding or joint holding format with another NRI or resident indian on ‘former or survivor’ basis . It is a risk- free investment option for NRIs who earn foreign currency overseas. You can remit the funds into your NRE account in any foreign currency. However, the deposit will be created in Indian Rupee. 

The Fixed Deposit tenure ranges from one year to ten years. You have the option to select the period of the deposit. Depending on the tenure, the interest rate is assigned. 

The paramount benefit of an NRE Fixed Deposit is that its principal, as well as accrued interest, is frrely repatriable in the foreign currency of your choice. 

NRI Tax liability is not present on an NRE Fixed Deposit. The interest earned on the deposit is exmept from tax in India.

For your convenience when you are overseas, the banks offer the option to appoint a resident Indian as a mandate holder for operative purposes. 

It is one type of investment where Tax on NRI FD is entirely exempt. 

NRE fixed deposits need to be maintained for atleast 1 year to be eligible for interest.

NRO Fixed Deposit

An NRO Fixed Deposit can be set up by an NRI in India. It is primarily opened to accumulate earnings generated in India through investments such as interest or dividends or receipts such as rent or consulting fees. The Fixed Deposit can be set up with the earnings received in India. 

NRI Fixed Deposit tax is present on the interest accrued through an NRO Fixed Deposit account. TDS is applicable on the interest earned on NRO fixed depost. The  NRO Fixed Deposits need to be maintained for atleast 7 days to be eligible for interest.

NRO Fixed Deposit is preferably set up for longer tenures. On maturity, a specific part of the funds is permissible for repatriation. You may transfer the interest earned on NRO Fixed Deposit to your NRE Account under current income scheme. However, it has to be reported to RBI with the necessary documentation. 

Tax Implications on Investment in Fixed Deposits

The Fixed Deposits illustrated in this article highlight their own merits. Income tax for NRI is applicable if they have any earning in India through various means. You, as an NRI, should choose the best option suitable for your investment profile. An NRE Fixed Deposit is exempt from taxation, but an NRO Fixed Deposit is liable for the NRI tax due.  Interest earned on NRE Fixed Deposit is exempt from tax in India but there is TDS applicable on interest earned on NRO Fixed deposit.

Tax Deductions On NRO Fixed Deposits

Interest earned on NRO Savings Account / NRO Fixed Deposit is subject to Tax deduction at source *(w.e.f Aug 09). TDS is deducted at 30% plus applicable surcharge and cess.

As per section 206AA introduced by Finance (No. 2) Act, 2009 w.e.f 01.04.2010, every person who receives income on which TDS is deductible shall furnish his PAN Number to the deductor, failing which TDS shall be deducted at the maximum marginal rate or 30% plus applicable surcharge and cess whichever is higher. The interest on NRO Accounts / Deposits and PIS transactions would be covered by the said rule

* TDS, when due and applicable will be deducted in accordance with the provisions of the Income Tax Act, 1961 and the Rules thereunder as in force. Such TDS shall be recovered from saving/current/demand deposit a/c(s).

Double Taxation Avoidance Agreement (DTAA)

Double Taxation Avoidance Agreement (DTAA) is an agreement entered by India with various countries. Under the current DTAA provisions, customer can enjoy concessional rate of Tax Deducted at Source (TDS) on interest earned in India. Hence by registering for DTAA clients can earn higher yield on their NRO deposits (FD as well as Savings Account).

As per recent amendment to the Indian Income Tax Act as announced in Union Budget 2012, NRIs who wish to avail DTAA benefit have to mandatorily provide 'Tax Residency Certificate (TRC)' to the deductor (Bank). This is applicable for all NR customers who wish to avail DTAA benefit with effect from 1st April 2012.

TRC is issued by the tax/government authority of the country where the NRI resides. So customers have to check with the Tax Department or Finance Ministry in their country or with their Chartered Accountant abroad for the procedure to obtain TRC. No other document in lieu of TRC shall be considered for availing the DTAA rate for the said year.

If you are desirous of availing the tax rate deduction as per the DTAA, the same will be applicable once you submit the below mentioned documents:

Documents Required:

1) DTAA Annexure. Click Here

2) PAN Card Copy self-attested

3) TRC. Click here

4) Form 10F*  Click Here.

*Form 10F is a self declaration to be submitted by the customer where TRC does not mention all the prescribed by Income Tax law. In case you have registered for DTAA benefit earlier or wish to register for the same, kindly provide latest copy of all the above documents to avail the DTAA rate for current financial year, failing which the bank will deduct TDS on interest earned on your NRO deposits at 30% plus applicable surcharge and cess.

Now that you are aware of the tax implications of investing in NRI FD’s in India, you have the option to choose the best fit for you. Many banks like HDFC Bank offer competitive interest rates on Fixed Deposits for NRIs. To open your NRE or NRO Fixed Deposit, click here.

5 Important Things To Consider Before Opening An NRI FD Account. Click here to read more.

*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.