Imagine living outside India and earning income abroad, but still needing to pay taxes in India. This scenario may seem surprising, but it is a reality for many non-residents who find themselves navigating the complexities of global taxation. Understanding how and when foreign income is taxed by India is crucial to avoid double taxation and ensure compliance with tax laws. In this article, we'll demystify the rules surrounding non-resident bank accounts and the resulting income taxation, making it easier for you to manage your financial obligations both at home and abroad.

     Non-Resident Bank Accounts function similar to regular bank accounts held by individuals, where periodic interest is accrued. As per the Foreign Exchange Management Act (FEMA) 1999, Non-Resident Indian’s (NRI) cannot have a resident savings account in his or her name in India. All the savings accounts shall be converted into Non-Resident Bank Accounts in India. The FEMA law mainly deals with the opening, maintaining and closing such accounts, while the Income Tax act deals with the Taxation part of the incomes that are generated through these accounts.

     According to FEMA regulations, to open such accounts, an individual must qualify as a Person Resident outside India (PROI). If an individual becomes a Person Resident in India (PRI), they can no longer maintain these accounts. 

    As per Section 2 of FEMA Act, 1999:

      (i)  a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—  

           (A) a person who has gone out of India or who stays outside India, in either case— 

                 a) for or on taking up employment outside India, or 

                 b) for carrying on outside India a business or vocation outside India, or 

                 c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; 

          (B) a person who has come to or stays in India, in either case, otherwise than— 

                a) for or on taking up employment in India, or 

                b) for carrying on in India a business or vocation in India, or 

                c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; 

      (ii)  any person or body corporate registered or incorporated in India, 

     (iii) an office, branch or agency in India owned or controlled by a person resident outside India,  

     (iv) An office, branch or agency outside India owned or controlled by a person resident in India

(W) “Person resident outside India” means a person who is not resident in India

    Major accounts, which an NRI can open in India, are listed below:

     i. Non-Resident Ordinary (NRO) account

    ii. Non-Resident External (NRE) account

   iii. Foreign Currency Non-Resident (FCNR) account

i. Non-Resident Ordinary (NRO) account: 

     a) NRO accounts are maintained by a Person Resident Outside India (PROI) for depositing income earned in India, with transactions denominated in Indian Rupees.

     b) These accounts can be held as current, savings, recurring, or fixed deposit accounts.

     c) Income earned in India may include rental income from property located in India, capital gains from the sale of property situated in India, and similar sources.

ii. Non-Resident External (NRE) account: 

     a) NRIs* and Persons of Indian Origin (PIO’s)** are permitted to open and maintain these accounts with authorized dealers and banks (including cooperative banks) authorised by the Reserve Bank of India.

     b) NRE accounts are maintained for depositing income earned outside India by the individual.

     c) Funds deposited in these accounts in foreign currency will be converted into Indian Rupees, as the funds can only be held in Indian currency.

     d) An NRE account can be held as current , savings, recurring or fixed deposit account,

     e) Rate of interest applicable to these accounts shall be in accordance with the directions/ instructions issued by Reserve Bank from time to time. 

     f) Inward remittances to the account and remittances outside India from NRE account are permitted without any restrictions.

**A ‘Person of Indian Origin (PIO)’ is a person resident outside India who is a citizen of any country other than Bangladesh or Pakistan or such other country, as may be specified by the Central Government, satisfying the following conditions:

A PIO will include an ‘Overseas Citizen of India’ cardholder within the meaning of Section 7(A) of the Citizenship Act, 1955. Such an OCI Card holder should also be a person resident outside India.

iii. Foreign Currency Non Resident (FCNR) account: 

    a) NRI’s and PIO’s are permitted to open and maintain these accounts with banks authorised by the Reserve Bank to maintain such accounts. 

    b) Deposits may be accepted in any permitted currency i.e. a foreign currency which is freely convertible

    c) If the remittance is received in a currency other than the designated currency, it should be converted into the latter currency by the authorised dealer at the risk and cost of the remitter and account should be opened/ credited in only the designated currency 

    d) The accounts can be maintained only in the form of fixed deposit

    e) Interest may be credited to a new FCNR account or an existing/ new NRE/ NRO account in the name of the account holder, at his option.

    f) Remittances received in Indian rupees for opening these accounts shall be converted by the authorised dealer into the designated foreign currency at the TTSR (Telegraphic Transfer Selling Rate) for that currency ruling on the date of conversion

   g) For the purpose of payment in rupees, funds held in these accounts shall be converted into rupees at the authorised dealer's TTBR (Telegraphic Transfer Buying Rate) for the concerned currency ruling on the date of withdrawal.

     Interest from NRO account is taxable in the hands of non-resident.  However, one’s residential status under Income Tax Act is immaterial for taxation of interest from NRE account and FCNR account. Hence status as per FEMA guidelines shall be considered. So let us see the taxation part, account wise:

     i. NRO account interest: The income earned through NRO account i.e the interest income credited by the bank either Quarterly, or yearly on the outstanding balance held will be taxable in the hands of the account holder as per the Income tax Act, and also liable for TDS (Tax deduction at Source). Such income shall be treated as a normal interest income and declared in the Return of Income under the head “Income from other sources”. 

    ii. NRE, FCNR account interest: Taxation of NRE & FCNR interest depends on one’s residential status under FEMA. If a person is PROI as per FEMA, such interest earned in India will be exempt under Income Tax Act. Such income shall be disclosed separately as exempt income in the Return of Income. 

Reference: 

   Vinisha Riona D’souza 

   Articled Assistant 

   Nitin J Shetty & Co