Returning to India: Are NRE Fixed Deposits Still Tax-Free?

Yes, your NRE bank fixed deposit interest is tax-free on return. This is the most common question asked by returning NRIs in India, as these accounts offer tax-free interest and full repatriation of funds while living overseas. 

For this, you need to re-designate the account into a resident foreign currency (RFC) account. However, this account

It remains tax-free till you hold a residential status other than NRI. 

Want to know after returning to India, what residential status allows you to hold NRE bank fixed deposits tax-free in India? Read the blog and get all your answers. 

Residential Status

The Foreign Exchange Management Act (FEMA) and the Income Tax Act, 1961, have different definitions of "residence" for NRIs. According to FEMA, an individual's intention to live in India is the main factor in determining residential status. Considering this, a person is a resident in India if he stays in the country for more than 182 days in the previous financial year. Additionally, he has been in the country for work or with a purpose for staying for an indefinite time. 

In contrast, the Income Tax Act, 1961, mathematically decides the residential status of a person. As per this, a person is said to be an Indian resident if he fulfills any of the stated conditions:

• An individual is a resident if he stays in India for 182 days or more in a financial year; or
• A person is in India for 365 days in four preceding financial years and 60 days in the present financial year.

However, if you are leaving the country for work purposes or are a member of the crew of an Indian merchant ship, or a person of Indian origin (PIO) visiting India, 60 days condition is replaced by 182 days.

This was about NRI status. Now, here the question is, what is the other residential status that allows you to have a NRE bank fixed deposit be tax-free in India? Well, without creating more suspense, it is Resident and Not Ordinarily Resident (RNOR) status. However, to hold an RNOR status and enjoy tax-free interest on NRE fixed deposits, you need to fulfill the following conditions:

• For 9 out of 10 years preceding the current year, you hold NRI status; or
• During the 7 previous years preceding the current financial year, you have not been in India for more than 729 days; or
• You are an Indian citizen and not a tax resident in any other country. Additionally, you have an Indian income of more than INR 15,00,000; or
• You are an Indian citizen or PIO, and your Indian income is more than INR 15,00,000. Also, you stayed in India from 120 days to 181 days in the previous year. 

So, returning NRIs need to meet any of the above-mentioned conditions to hold the RNOR status. Additionally, the tax liability of their income depends on their residential status and the nature of the income in India. 

Furthermore, you now know the residential status you need to hold to receive NRE bank fixed deposit interest tax-free. However, as mentioned earlier, you also need to redesignate your NRE fixed deposit account to an RFC account. 

Moving ahead, let's know about the tax implications of interest earned on these accounts. 

Tax Implications on Interest Earned on NRE Fixed Deposit Account

As long as you have a tax status of NRI, the interest earned on the NRE account is tax free form income tax in India. It is well-known to every NRI. Once you become a resident, your NRE account must be redesignated to a resident or RFC account.

However, once you return to India permanently, you need to inform your banker to re-designate your NRE account to a resident foreign currency (RFC) account within 30 days of your return. The money in this account is held in foreign currency, preventing the risk of foreign exchange fluctuation. Once your account is re-designated, the interest income earned becomes taxable.

You can make the interest income earned from your RFC account tax-free till you hold RNOR status as per the Income Tax Act, 1961. Further, once your tax status changes to ordinary resident, interest from this account will be taxable. 

This was all about the NRE FD taxation in India. Moving further, let's know why choose NRE fixed deposits. 

Why Choose NRE Fixed Deposits?

Here are some of the common reasons to choose an NRE fixed deposit account:

• The deposits made in this account are in Indian rupees.
• It allows fund withdrawal in any foreign currency.
• An NRE fixed deposit account does not have any NRI tax liability. It means the interest you earn on these accounts is tax-free. Additionally, it allows full repatriation without any restrictions. 
• Tenure ranges between one year and 10 years. 
• You can close the NRE FD whenever you want.
• Additionally, in the NRE vs NRO FD comparison, most banks provide loans against NRE deposits. 

So, this is why it is generally advisable to choose NRE fixed deposits. Another attractive benefit of opting for NRE fixed deposits is a high-interest rate that is tax-free in India. Read the next section to know more about it. 

NRE Fixed Deposit Rates

From bank to bank, the interest rates on NRE fixed deposits vary. Additionally, the rates also vary according to the tenure of the fixed deposits. For instance, on one-year fixed deposits,Interest rates on NRE FDs typically range between 4.5% to 7%, depending on the bank and tenure

Furthermore, in comparison with resident FDs, NRE FDs have a high-interest rate in India. Currently, depending on the Indian bank and tenure, the interest rates vary between 4.50% abd 6.75% on NRE fixed deposits. 

This was all about NRE FD rates. Moving forward, let's know the benefits of NRE FD accounts.

Benefits of NRE Fixed Deposits (FD) Accounts

The benefits of NRE fixed deposits for NRIs are as follows:

• Flexibility: The money in this account is deposited in the Indian currency. However, during withdrawal, you can convert them into any foreign currency. Most of the Indian banks accept currency conversion. This means you do not have to go through the conversion process.
• Higher Interest Rates: Compared to a regular savings account, on NRE FDs, you get higher interest rates. Additionally, if you are transferring money to India, instead of keeping the amount in an NRO NRE account, it is better to open an NRE FD. It provides you with more interest.
• Low Minimum Deposit Account: You can open an NRE FD account with a small amount of INR 25,000. Generally, most banks allow this low minimum deposit. Further, it gives the option to open multiple NRE FDs in India with small amounts.
• Competitive Exchange Rate: As stated earlier, you can convert any foreign currency to INR and open an NRE FD. The conversion rates offered by the banks are among the best in the market.
• Loan Options: On NRE fixed deposits, most of the Indian banks provide you with attractive loan options. Considering this, you can get up to 90% loan on your deposits at good interest rates.
• Easy Renewal: In NRE FDs, if you invest for the long term, you do not have to worry about paperwork or form submission for renewal. On maturity, your principal and interest amount on NRE FDs are automatically renewed. 
• Tax Benefits: The interest earned on NRE FD is exempt from tax in India. Also, upon maturity, it allows full repatriation of funds overseas without any restrictions. 

So, these are the benefits of NRE FDs that an NRI receives in India. 

Final Thoughts

Lastly, India is an emerging market and has the potential to grow better than other countries. To get the benefit of it, NRIs invest in the country, and when they return to India, somehow the calculations become complicated. For instance, when living overseas, the NRE bank fixed deposit interest was tax-free, but after returning to India, it became taxable. Although they can enjoy tax-free interest on this account with an RFC account and RNOR status. 

However, for this, they need to do proper tax planning and have an understanding of this regulation. Tax planning is quite complicated for NRIs, and the goal of Savetaxs is to make it easy for them. With years of experience in tax planning, we help you to reduce your tax obligations and resolve your financial and investment-related queries. So, if you are facing issues in tax planning or investment in India, do connect with us and enjoy a seamless process.