If someone says “do not invest in Debt or Fixed Deposit” – he is not your advisor. But investments in Fixed Deposits or Term Deposits by NRIs are very common due to the liquidity of funds & their taxability. But Taxation of NRI Term Deposits needs to be understood to get the maximum value of investments. So let’s check the Taxation on NRI Fixed Deposits.

The taxation on NRI deposits is based on his residency. This means he needs to be clear on his status as being Resident or NRI. The residency rules of 182 days being in India are applied with certain conditions. Please check here.

NRI Bank Accounts

AN NRI can have NRO, NRE, FCNR, RFC accounts in banks. Out of these NRE & NRO can be Savings Account, Current Account, or Fixed Deposit Account. But FCNR & RFC are Term Deposit accounts only.

Taxation on NRI Fixed Deposits

Taxation for NRO Account

An NRO account is opened or maintained by NRI or PIO to manage his Indian income and money before turning into an NRI.

As mentioned NRO accounts can be Savings, Current & Fixed deposits.

NRO savings & NRO Fixed Deposit interest is taxable in India. The banks also deduct TDS at interest payment. Banks deduct tax at source (TDS) when crediting interest to your account if the amount of interest exceeds ₹40,000. It applies to all investors, except senior citizens. The limit for senior citizens is ₹50,000.

This income is added to other incomes and is taxed as per individuals’ tax bracket.

The income is charged as “income from other sources” in the ITR form. Also rebate under section 80TTA & 80TTB is allowed.

NRI can also claim relief under Double Taxation Avoidance Agreements (DTAA) to avoid paying tax in 2 countries for the same income.

Taxation of NRE Account

NRE account is maintained to manage global income. NRE account can be a Savings, Current, or FD. Current accounts do not pay any income.

Interest income from NRE Savings & NRE Term Deposit is tax-free in India. This interest, as well as principal, is fully repatriable with no limits.

Tax-Free in India does not mean it is tax-free in your country of residence. You need to check in your respective country. If they charge tax on deposits made outside their country, you have to pay tax accordingly.

Taxation of FCNR Account

FCNR is your term deposit denominated in foreign currency. The interest earned is completely tax-free.

Taxation of RFC Account

RFC or Resident foreign currency account is a term deposit made by Resident or not ordinarily resident (RNOR) in India in Foreign currency.

A person who was non-resident for at least 9 out of 10 previous years before the previous year under consideration or a person‘s stay in India during the 7 previous years before the previous year under consideration should be 729 days or less, shall have the status of “Resident but not ordinarily resident (RNOR)” for two years from his return.

Interest from such a deposit is free until the RNOR status is maintained. Once you become an Ordinary Resident, the interest is taxable just like NRO or Savings deposits.

In cases when a person becomes a resident the RFC deposits will attract tax to be deducted at source on interest income as per prevalent income tax rules in India.

Taxation of NRI Term Deposits

I have laid all the general rules prevailing. For any specific country or more clarity, you may reach me via my email or comments section below.

Disclaimer: The above article is based on various materials available in the public domain & our interaction with our clients. You are requested to take a professional view from a CA or CPA.