Recently, Non-Resident Indians (NRIs) have been receiving notices from the Income Tax department for credits in NRE accounts or having NRE deposits and not filing their income tax returns.
As per the Income Tax Act, the interest on NRE savings and deposit account is exempt from tax and NRIs are not required to file their income tax returns if their other income exceed the income not chargeable to tax (Rs. 250,000).
So if an NRI transferred Rs. 100 crores to NRE account and have an FD and earn Rs. 8 crore as NRE FD interest and only Rs. 100 on NRO interest, the taxable income is only Rs. 100 and the NRI was not required to prove the source of funds or file the income tax return in India.
Previously, NRE FD interest and account balances were not reflected in Form 26AS, leading NRIs to believe that the Income Tax department would neither inquire about nor have visibility into NRE accounts.
However, it has changed now.
The banks are now reporting the account balance on all accounts, including NRE savings account as well as NRE time deposits to the Income tax department under Section 285BA(1) (Statement of Reportable Account) or SFT-005 (Purchase of Time deposits (other than a time deposit made through renewal of another time deposit))
And, the income tax department is issuing notices under sections 133(6) or 142 or 148A or any other section inquiring about the genuineness of transactions and verifying the original source of funds and making sure that the tax, if any, has been paid.
And, these notices sound scary with words like unexplained credit, income escaping assessment, etc.
Required Documents for NRI Tax Clarification on NRE FDs
NRI need to provide the Information/clarification along with the supporting documentary evidence relating to source of the fund. The following documents and information are usually required and to be provided:
1. Correct Residential Status as per Income Tax Act by providing the date of arrival and departure for last 3-7 years with copy of passport pages with entry and exit date stamps
2. If the FDs were made out of funds in India, bank statements showing bank balance or statement of other banks for transfer of funds between banks
3. If credits in NRE or NRE FDs were made from remittance from abroad, foreign bank account statement highlighting debit and corresponding entry highlighting credits in Indian bank statement.
In addition, the credits in foreign bank account is to be explained or proved with source of funds like paystubs / salary certificate or business income, Tax Residency Certificate (TRC) and foreign income tax returns proving the income was included in the tax return and tax has been paid,
4. If credits in NRE directly from third party, whether the income is included in foreign tax return and explanation for the same and why this income is not to be taxed in India.
And, the Income Tax Officers may ask for additional Information as they may deem fit.
Steps to Take If You Receive a Tax Notice & How to Avoid It
A. If you have received the notice:
DO NOT IGNORE. Please respond to the notice within the stipulated time and close the matter to the Income Tax officer’s satisfaction BEFORE MARCH 31.
Else, you may get the notice to file the older income tax return, the case could be selected for complete or selected scrutiny and you will have to provide much more information, documentation and explanation, resulting in unnecessary cost of time, money and energy as well as negatively affecting mental peace.
B. If you want to reduce the probability of receiving a notice:
For NRIs with no income other than NRE FD interest and who are not filing tax returns in India, it is advisable to file an income tax return proactively. While NRE FD interest remains exempt, including it as exempt income in your return can provide clarity and reduce the likelihood of notices from the tax department.
How You Can Prevent Tax Notices Easily
If an NRI does not want to receive or want to reduce the likelihood of receiving notices, our recommendation is to file the income tax return in India and include the NRE savings and FD interest as Exempt income in the income tax return.
1) Is NRE account interest taxable in the US?
Yes, interest earned on an NRE account is taxable in the US for individuals who are US residents, as the US taxes global income.
2) Interest on NRE account exempt under which section?
Interest on NRE accounts is exempt from tax in India under Section 10(4)(ii) of the Income Tax Act.
3) Is interest on a NRE account taxable in the US?
Yes, US residents must report interest from NRE accounts as taxable income when filing their US tax returns.
4) Is a NRE fixed deposit taxable?
In India, interest on NRE fixed deposits is exempt for NRIs. However, it may be taxable in the country of residence, like the US, depending on local tax laws.
For any comments or questions, please contact us at info@neuronwealth.com
