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NRI's CORNER - TAX FREE INCOME

CMA Gul S 
Updated on 30 June 2020

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Income-Tax  exemptions are a bonanza offered to NRIs but caution is required while enjoying these tax exemptions and one needs to " read between the lines " as the same are  based on the residential status of an NRI under FERA1973 (FEMA1999) and the I.T. Act 1961 and differ from income to income, compelling every NRI - to have a twin identity ( like a La Bollywood double - role movie). The same are discussed hereunder :

 

Tax Free Income of NRIs as defined by  FERA,1973

 

Tax Free Income of NRIs as defined by I.T. ACT, 1961

 

Overseas  Income of NRIs

All the above topics are explained in simple language together with:

01

Copy of relevant Section / Regulation of the Act.

02 

Copy of relevant Notification, Circular or Press Release.

03

An example in case of intricate provisions.

femaonline.com  - is one of its only kind of website displaying most updated Foreign Exchange Management Regulations - updated almost everyday. The website also has special corners for Non Resident Indians (NRIs), Returning NRIs and Bankers.

Although, the content of the website can be viewed by registered users only, we welcome you to a preview of detailed contents of " Tax Free Income for NRIs under FERA, 1973.

  TAX FREE INCOME FOR NRIs UNDER FERA, 1973

Statutory Warning: Viewers  not  exposed to complex provisions of Law may read further at their own risk of loosing their patience & even nerves - pun unintended !!! Please read on...
1.

Under the Income Tax Act, 1961 certain incomes are granted tax exemption to a Non Resident Indian, provided such NRI is  'a person resident outside India" as defined under Sec. 2(q) of FERA, 1973. These are :

 

01

Interest earned from Non Resident (External) NR(E) account by an individual -

[ Section 10(4) (ii) of Income Tax Act,1961.]1

 

02

Interest earned from Foreign Currency Non Resident (Bank) FCNR(B) account by an individual - [ Section 10(4) (ii)] 1 r.t.w. [Section 10(15)(iv)(fa) of  I.T. Act, 1961] 2 

 

03

Interest earned on State Bank of India's Resurgent India Bonds (RIBs)  [ Section 10(15)(i)]of  I.T. Act, 1961  &   [Notification No. SO 844(E) dtd. 21/09/1998]3

  04

Interest earned on State Bank of India's India Millennium Deposits (IMDs)      [Section 10(15)(i)of  I.T. Act, 1961] 2

  Now, We will look into detailed analysis of one of these incomes namely "  Interest earned from Foreign Currency Non Resident (Bank) account[ FCNR(B)]    BY an individual  NRI "  

    Interest earned from Foreign Currency Non Resident (Bank) account 

[ FCNR(B)]    BY an individual  NRI   

Section 10(4)(ii) refers to NR(E) account in accordance with Foreign Exchange Regulation Act, 1973 which exempts income in case of an individual who is a person resident outside India as defined vide Section 2(q) of the F.E.R.A.,1973. 
[Section 10(4) (ii) of I.T. Act, 1961.] 1

2

Although FERA, 1973 has been replaced by FEMA, 1999, various provisions of the Income Tax Act, 1961 and Wealth Tax Act, 1957 continue to refer to / provide exemptions to definition / provisions under FERA, 1973.
3 Now, under Foreign Exchange Regulation Act, 1973 FCNR(B) account was covered by the terms of Non Resident (External) Accounts Rules, 1970. 

4

Hence, in case of an individual NRI, both NR(E) rupee accounts as also FCNR(B) foreign currency deposits are exempt by virtue of provisions of Section 10(4)(ii) of the I.T.Act, 1961.

5.

01.  
 
 

Under Foreign Exchange Management Act 1999 both an NRI as also OCB - (i.e. Individual Non- Resident Indian & Overseas Corporate Body) -  both are eligible to open & maintain FCNR(B) a/c.An OCB was only eligible uptill 3-10-2003. 
[ Paragraph 1 of Schedule 2 of FEM (Deposit) Regulations, 2000.] 4 

  02.  However, provisions of  Section 10(4)(ii) apply only to an individual Non-Resident Indian. 
  03.  An Overseas Corporate Body (OCB) earning Interest on FCNR(B) is not exempt by the provisions of said Section 10 (4)(ii) as it refers only to an individual.
6.

It is a bit strange but an OCB's interest income from FCNR(B) deposit  is exempt vide provisions of Section 10(15)(iv)(fa) of I.T.Act, 1961.

[Section 10(15)(iv)(fa) of I.T.Act, 1961.]5

===============================================================

===============================================================

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1

Section 10(4)(ii) of the I.T. Act,1961.

 
In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-  

S.10(4)(ii)

in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the rules made there under:6 / 7  

Provided that such individual is a person resident outside India as defined in clause (q) of section 2 8 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account;]  

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2

Section 10(15)(i) of the I.T. Act,1961

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-  

S.10(15)(i)

Income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf, subject to such conditions and limits as may be specified in the said notification;  

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3

Notification No. SO 844(E) dtd. 21/09/1998 

 
SO 844(E) The Central Government specifies the Resurgent India Bonds, being bank instruments representing foreign currency denominated deposits in the form of promissory notes, issued by the State Bank of India, a bank constituted under section 3 of the State Bank of India Act, 1955 (23 of 1955), as deposits for the purposes of section 10(15)(i) - Notification No. SO 844(E), dated 21-9-1998.

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4

[ Paragraph 1 of Schedule 2 of FEM (Deposit ) Regulations, 2000.]

 

Para1.

Eligibility.

  (a) NRIs and OCBs(word OCB omitted w.e.f 3-10-2003) are eligible to open and maintain these accounts with an authorised dealer.
 

Note:

Opening of FCNR(B) accounts in the names of NRIs / OCBs of Bangladesh/ Pakistan nationality/ ownership requires approval of Reserve Bank.

(b)  

These accounts may be opened with funds remitted from outside India through normal banking channels or funds received in rupees by debit to the account of a non-resident bank maintained with an authorised dealer in India or funds which are of repatriable nature in terms of the regulations made by Reserve Bank. Accounts may also be opened by transfer of funds from existing NRE/FCNR accounts.

  (c)

Remittances from outside India for opening of or crediting to these accounts should be made in the designated currency in which the account is desired to be opened/maintained. Without prejudice to this, if the remittance is received in a currency other than the designated currency (including funds received in rupees by debit to the account of a non-resident bank), 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)

In case the depositor with any convertible currency other than designated currency desires to place a deposit in these accounts, authorised dealers may undertake with the depositor a fully covered swap in that currency against the desired designated currency. Such a swap may also be done between two designated currencies.

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5

Section 10(15)(iv)(fa) of the I.T. Act,1961.

 
In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-  
S.10(15)(iv)(fa) interest payable-  
   

by a scheduled bank to a non-resident or to a person who is not ordinarily resident within the meaning of sub-section (6) of section 6 on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India.  

   

Explanation - For the purposes of this item, the expression "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36;

 

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6

Circular No. 592, dated 4-2-1991 

 

Exemption of interest on Non-resident (External) Accounts in the case of joint account holders

Section 10(4)(ii) of the Income-tax Act, 1961, provides for exemption from Income-tax in the case of an individual, who is a person resident outside India as defined in clause (9) of section 2 of the Foreign Exchange Regulation Act,  1973 (46 of 1973), on any income by way of interest on moneys standing to his credit in a Non-resident (External) Account in any bank in India in accordance with the said Act and the rules made there under.  

2

The issue, whether the interest income on moneys standing to the credit in Non-resident (external) Accounts in joint names is exempt from income-tax under section 10(4)(ii) of the Income-tax Act, has been raised before the Board as some Assessing Officers are not treating such interest income as exempt from Income-tax. The controversy has arisen because of the use of the word "individual"� in section 10(4)(ii), inserted by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1st April, 1989, which was not there in the earlier section 10(4A).  It is argued that the interest on Non-resident (External) Accounts in joint names, which was exempt from tax prior to 1st April, 1989, because of the use of the word "person"�, shall not be exempt now because such joint account holders constitute a separate entity, viz. "association of persons"� and cannot be said to be individuals.  

3

The matter has been examined and it is clarified  that the joint holders of the Non-Resident (External) Accounts do not constitute an "association of persons"� by merely having these accounts in joint names.  The benefit of exemption under section 10(4)(ii) of the Income-tax Act will be available to such joint account holders, subject to fulfillment of other conditions contained in that section by each of the individual-joint account holders.

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7

Circular No. 604, dated 11-6-1991

 

Tax problems of non-resident Indians repatriated from Kuwait

By Circular No. 590, dated 30-1-1991, Indian nationals normally resident in Kuwait who were forced to return to India because of the Iraq invasion, were made eligible for exemption under section 10(4)(ii) of the Income-tax Act in respect of their NRE/FCNR accounts maintained by them up to 31st March, 1991.

2

With the cessation of hostilities in the Gulf and with a view to facilitate the Kuwait NRIs to return of Kuwait, Reserve Bank of India has now decided to permit them to continue to maintain their NRE/FCNR accounts in banks in India and to maintain their foreign currency accounts and assets abroad for a further period up to 30th June, 1991.  

Taking into account the above mentioned factors, it is clarified that individuals normally resident in Kuwait and returning to India after 2nd August, 1990, would now be eligible for exemption under section 10(4)(ii) of the Income-tax Act in respect of such accounts maintained up to 30th June, 1991.  

 

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8

Section 2 (q) of the Foreign Exchange Regulation Act, 1973, defines person resident outside India

 
Sec.2(q) Clause (q) of section 2 of the Foreign Exchange Regulation Act, 1973, defines "person resident outside India"� as follows :
  "˜(q) "person resident outside India"� means a person who is not resident in India ;"™
 

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9

Sec. 2(p) of FERA, 1973

 
Sec.2(p)

"person resident in India" means -

  (i)

a citizen of India, who has, at any time after the 25th day of March, 1947, been staying in India but does not include a citizen of India who has gone out of, or 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;

  (ii)

a citizen of India, who having ceased by virtue of paragraph (a) or paragraph (b) or paragraph (c) of sub-clause (I) to be resident in India, returns to, or stays in, India, in either case -

   

(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;

 

(iii)

a person, not being a citizen of India, who has come to, or stays in, India, in either case -

   

(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 staying with his or her spouse, such spouse being a person resident in India, or

   

(d)

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

 

(iv)

a citizen of India, who, not having stayed in India at any time after the 25th day of March, 1947, comes to India for any of the purposes referred to in paragraphs (a), (b) and (c) of sub-clause (iii) or for the purpose and in the circumstances referred to in paragraph (d) of that sub-clause or having come to India stays in India for any such purpose and in such circumstances.

 

Explanation - A person, who has, by reason only of paragraph (a) or paragraph (b) or paragraph (d) of sub-clause (iii) been resident in India, shall, during any period in which he is outside India, be deemed to be not resident in India;

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