How Interest Income Is Treated Under Income Tax Laws
My son went to the United States last month for a job and therefore became a non-resident under FEMA. Should he open an NRE account? How is an NRO account different from an NRE account?
Answer: Once an Indian resident becomes a non-resident under the FEMA provisions, they must notify their bank of the change in their residency status. Banks then redesignate all existing bank accounts as NRO accounts. Generally, there are no restrictions on the money that can be deposited into your NRO account. You can also open a new NRO account after becoming a non-resident under FEMA. Up to 1 million USD can be paid annually from your NRO account, after paying applicable taxes in India.
An NRE account is an account that a person can open after becoming a non-resident under FEMA. The NRE account can be held in Indian currency or any authorized foreign currency. There are restrictions on how much money can be credited to an NRE account. Generally, money sent through the bank channel from outside India can only be credited to an NRE account. The money in the NRE account is fully repatriable outside of India. An NRE account is practically a bank account maintained outside of India although in reality maintained with Indian banks.
Regarding taxation, interest earned on an NRE account is fully exempt under section 10. However, interest credited to the NRO account is fully taxable in India and banks are required to withhold tax at the source on interest credited on all NRO banks. account including a savings account.
Balwant Jain is a tax and investment expert and can be contacted on [email protected] and @jainbalwant on Twitter
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