Taxability of interest income

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Piyush sharma (Querist)
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25 February 2016 If an NRI is having NRE AC then interest accrued on NRE AC is exempt as per sec 10 subsection 2 clause 4 but I want to know what will happen when NRI become resident. Then the taxability of interest will be taxed according to FEMA act or income tax act and whether now the interest income received will be taxable or not

Nikhil Kaushik online

Nikhil Kaushik online

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26 February 2016 does FEMA has any taxation provisions? once the NRI becomes resident, NRE account interest will be taxable.

Piyush sharma

Piyush sharma (Querist)
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26 February 2016 sir does meaning of resident is different in RBI act

Piyush sharma

Piyush sharma (Querist)
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26 February 2016 sir does meaning of resident is different under RBI act

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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26 July 2025 Yes, your question brings up an important distinction: the concept of **“Resident”** is defined differently under the **Income Tax Act, 1961** and the **Foreign Exchange Management Act (FEMA), 1999** — and this difference **impacts the taxability of NRE account interest**.

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### 🔹 Interest on NRE Account – Taxability Overview

#### ✅ **Exemption under Income Tax Act**:

* As per **Section 10(4)(ii)** of the Income Tax Act:

> Interest income on NRE (Non-Resident External) account is **exempt from tax** **only if the individual qualifies as a “Person Resident Outside India” under FEMA**.

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## 🔍 Key Definitions:

### 📘 1. **Resident under Income Tax Act**:

Defined under **Section 6** of the Income Tax Act – based on **physical presence** in India during the previous year.

### 📗 2. **Resident under FEMA**:

Defined under **Section 2(v)** of FEMA:

> A person residing in India for **more than 182 days during the preceding financial year** is **generally considered a resident**, **except**:

* If they have gone abroad for:

* **Employment**
* **Business or vocation**
* **Any purpose indicating an intention to stay outside India for an uncertain period**

So, someone could be a **Resident under the Income Tax Act** but still be a **Non-Resident under FEMA** (especially in the transition year).

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## 🔄 Implication on NRE Account Interest:

| Situation | Resident under Income Tax Act | Resident under FEMA | Interest on NRE A/c | Taxable? |
| ------------------------------------ | ----------------------------- | ------------------- | ------------------- | ----------------------------------------- |
| NRI (abroad for job/business) | ❌ | ❌ | Earned | ❌ Exempt u/s 10(4)(ii) |
| Returning to India (transition year) | ✅ | ❌ | Earned | ❌ Still exempt |
| Settled in India permanently | ✅ | ✅ | Earned | ✅ **Taxable** from date of FEMA residency |

> ⚠️ **Once the person becomes a Resident under FEMA**, the **interest on NRE account becomes taxable** in India from that point onward.

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## ✅ Summary:

* **FEMA governs account eligibility**, and **Income Tax Act governs taxation**.
* **Section 10(4)(ii)** explicitly links the **tax exemption to FEMA residency status**.
* Therefore:

* **Interest on NRE account is exempt** **only while the account holder is a non-resident under FEMA**.
* Once the person becomes a **Resident under FEMA**, the **interest becomes taxable** as **Income from Other Sources**.

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Let me know if you'd like help calculating interest income or updating your ITR after status change.

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