Caveat emptor – Interest on NRE Fixed deposits
We came across an advertisement from one of the prominent Indian bank, which said “. . . . Bank offers its NRI customers a never before opportunity to avail up to 9.5%* interest rates on NRE Fixed Deposits. With 100% repatriation, complete tax exemption on the entire interest amount and the soaring exchange rates you are sure to gain maximum returns”
We at NS Global wanted to bring clarity to the Investors on the term “complete tax exemption on the entire interest amount”.
Let us understand Indian Tax laws.
Under the Indian Income Tax Act, Interest income from Non Resident External Account (NRE A/c.) is exempt from tax under section 10(4).
So far so good.
Now let us understand from US point of view.
We have decided to draw a chart to explain the provisions.
| Person who is a: | Individual residing in USA | Individual residing in India |
| US Citizen | The person is required to disclose its world wide income in its US Income tax return. So, even though this interest income is tax free inIndia, it would be still taxable in US.The person won’t have any benefit of Indo-US tax treaty due to Article 1(3) of the treaty. | Same provisions as if the person was residing inUSA. |
| US Green Card holder or a US Resident Alien | The person is required to disclose its world wide income in its US Income tax return. So, even though this interest income is tax free inIndia, it would be still taxable in US.The person won’t have any benefit of Indo-US tax treaty. | The person is required to disclose its world wide income in its US Income tax return.However, the person can claim the benefit under the “tie-breaker rules” of the Indo-US tax treaty.
If you are a resident of the treaty country under the tie-breaker rule and you elect to apply the treaty, you will be considered to be a resident of the treaty country forU.S.income tax purposes.
Thus, you would not be liable to pay tax on the NRE Interest income and will not be required to file a U.S. Resident Alien Income Tax Return (Form 1040).
To make this election, you must file a U.S. Nonresident Alien Income Tax Return (Form 1040NR) in the year of the election and attach a copy of Form 8833. |
Please note that you are still required to be compliant on your annual FBAR filing.
Hope the above would bring enough clarity on the term “complete tax exemption on the entire interest amount” to the Investors.
