Fixed Deposits and Income Tax: A Must-Read for NRIs

Fixed deposits are low-risk investments that offer guaranteed returns, making them one of the safest forms of investment instruments, especially in India, where NRIs look for secure long-term investments rather than high-risk investments. 

Fixed deposits offer guaranteed returns through their locked-in interest for their entire tenure, providing individuals a sense of financial security and certainty in their financial planning. Unlike residents, fixed deposit investments for NRIs have to be maintained effectively for income tax returns. 

As of now, NRIs have three categories of accounts to manage their income. The following are the three different types tailored for NRIs to manage foreign and Indian income efficiently. 

1. Non-Resident External (NRE) Fixed Deposits 


An NRE Fixed Deposit account is a tax-free account in India specially designed for NRIs. It allows NRIs to invest their foreign income in fixed deposits in India. Both the principal and interest amounts in this account are freely repatriable outside India without any restrictions. 



2. Non-Resident Ordinary (NRO) Fixed Deposits

   
   An NRO Fixed Deposits account is also designed for NRIs to invest their income earned in India. They can deposit income from rent, dividends, or pensions in India and earn interest on it. However, interest earned in NRO Fixed Deposit accounts is subject to tax under the applicable tax rates. 
   
   

   1. Foreign Currency Non-Resident (FCNR) Fixed Deposits

   
   Foreign Currency Non-Resident (FCNR) is similar to Non-Resident External (NRE) Fixed Deposit accounts. A Foreign Currency Non-Resident account allows you to hold designated foreign currency earnings in India and earn interest for a fixed period in foreign-denominated currency. The principal amount and interest earned can be freely repatriated back in foreign currency. 
   
   

   Impact of Changing Residential Status on Fixed Deposits

   
   All NRIs must be aware of the impact of applicable taxes on their Fixed Deposit Accounts once their residential status is changed to “Resident”. Exemptions for NRE accounts are only available when you are a Non-Resident under the “Foreign Exchange Management Act, 1999” (FEMA). The moment your residential status changes to a resident under FEMA, you will lose the tax benefits on your earnings in NRE accounts in India. 
   
   Unlike the Income Tax Act, the intention of the stay (in India or abroad) is more relevant than the duration of the stay for determining the residential status of a person under FEMA. Moreover, it is legally required for every NRE account to be redesignated as a Resident Rupee Account immediately upon returning the account holder to India for taking up employment or for carrying out business or for any other purpose with the intention of staying in India for an uncertain period. 
   
   For example, if an NRI decides to come back to India permanently, his/her residential status must be changed immediately to a Resident from the date of his return to India, and thereafter, the interest earned on his/her NRE deposits becomes taxable. 
   
   Therefore, NRIs returning back to India must inform their bankers about their residential status shifts and redesignate their bank accounts and deposits accordingly. Additionally, you must adhere to the tax obligations and carry out proper tax planning with the help of your chartered accountant to manage your taxes.  
   
   

   Monitoring of Fixed Deposits by the Income Tax Department 

   
   It is crucial for NRIs to re-designate their residential status as they move to India because the details of all Fixed Deposit related transactions are collected by the Income Tax Department. This is applied to every newly opened, renewed, or existing NRE, NRO, or FCNR deposit. This monitoring procedure is following the shift in the government’s focus to examine whether the expenditures and investments of the individuals are aligned with the income declared for tax purposes. 
   
   Moreover, NRIs should also maintain the records of the source of income and residential status at the time of investment. Because in some cases, NRIs have received notices for investments made ten years ago. Having these documents will help safeguard against queries from the Tax Department and prove your source of income and residential status to counter these notices and prevent any penalty. It will also be beneficial for NRIs to file their tax returns in India. 
   
   
   

   Conclusion

   
   Income tax on NRIs’ fixed deposit accounts is relevant to NRIs’ residency status. NRIs can reap the tax benefits from NRE and FCNR Fixed Deposit accounts if their residential status is NRI. As their residential status changes, they need to inform their bankers and redesignate them as Resident Rupee Accounts immediately under the FEMA Act of 1999. 
   
   Furthermore, NRIs are required to maintain their Fixed Deposits transactions details to prove their source of income and residential status in the future if a notice arises. The tax department also gathers all these documents to ensure that expenditures and investments are aligned with the declared tax purposes. 
   
   While fixed deposits offer a reliable way to grow your savings through guaranteed interest, it is crucial to become mindful of the tax implications that come with changing your residential status. Becoming aware of these tax implications can help you maximize their benefits. 
   
   

   Income

   Share Trading Property Sale Rental Income Salary Income

   Compliance

   Shift in NRI Status Assessments Tax Return

   General

   Residential Status TDS TCS Gift and Cash Taxable Income

   Investments

   Bank Deposits Shares Other Investments Properties

   Succession Planning

   Succession Planning And Will