An NRE Account (Non-Resident External Account) is a type of bank account in India designed for Non-Resident Indians (NRIs) to manage their income earned abroad. One of its key benefits is its favorable tax treatment in India. Here’s an overview of NRE accounts and their taxability:
Taxability of an NRE Account in India
- Interest Income:
- The interest earned on an NRE account is fully exempt from income tax under Section 10(4)(ii) of the Income Tax Act, 1961.
- This exemption applies as long as the account holder qualifies as an NRI under the tax residency rules.
- Principal Amount:
- The principal amount deposited in the NRE account (foreign earnings) is not taxable in India since it originates from outside India.
- Repatriation:
- The funds (both principal and interest) are fully repatriable, meaning you can freely transfer them back to your country of residence without any tax implications in India.
- Wealth Tax:
- India abolished the wealth tax in 2015, so there is no tax on the wealth held in an NRE account.
- Gift Tax:
- If funds from the NRE account are gifted to a relative, there is no tax liability. However, gifting to non-relatives may attract taxes depending on the amount and the recipient’s tax obligations.
- Currency Exchange Gains:
- Gains or losses from currency exchange fluctuations are not taxed.
Tax Rules After Returning to India
When an NRI returns to India and becomes a Resident Indian for tax purposes:
- Account Conversion:
- The NRE account must be converted into a Resident Foreign Currency (RFC) account or a regular resident account.
- Taxation of Interest:
- Interest on the account will no longer be exempt and will be taxable as per the individual’s tax slab rate.
Who Qualifies for NRE Tax Exemptions?
To qualify for tax exemptions on the interest earned in an NRE account, the account holder must:
- Be an NRI as per Income Tax Act rules, which means spending less than 182 days in India during a financial year.
