UK resident earning overseas interest income from India

UK resident having bank deposits in India. What do i need to do about the Interest earned ?

For basic guidance see link.

Is overseas income is taxable in the UK?

Example, a UK tax resident have a fixed deposit in India and earns interest on it, does he have to pay tax on that earned interest income in UK?

Brief answer is Yes. Source: see point 6.62 of RDR1 guidance.


Is there any relief, as this income may suffer tax twice once in India and again here in the UK?

There is a relief available called Foreign Tax Credit Relief aka DTR detailed guidance given in Helpsheet 263

DTR given is lower of:
a – Overseas tax suffered; or
b – UK tax on overseas income.

a – Overseas tax figure is taken from Tax Deducted certificates client provides, but it is restricted by the ‘treaty rate’ as per DTAA which is 15% (in case of India). This means in case a client earns £5,000 and tax is deducted off him at 20% say £1,000, he can only put the figure as £750 (15%) for overseas tax suffered.

He needs to approach Indian Tax authorities to get a refund of remaining tax.

b – UK tax on overseas income.

I have enumerated the steps to calculate this figure from ICAEW textbook below.

Step 1: Calculate the tax (before DTR) including all sources of income. Say £A

Step 2: Calculate tax but exclude overseas income, Say £B

Step 3: Deduct £A – £B. This is UK tax on overseas income.

Once DTR is determined we need to put it in box 2 of form SA 106 to ensure correct tax liability is calculated.

Example: Tax year 2018-19

Miss Amrita Sher-Gill (in case she is still alive!) lives in the UK and earns employment income of £30,000 and has interest income of £5,000 from India on which £1,000 tax has been taken off @ 20%.

Step 1:  Tax £4,430
Step 2:  Tax £3,630

Step 3: Tax on overseas income £4,430-£3,630 = £800

Compare:
a – Overseas tax taken off £1,000 but maximum allowed 15% : £5,000 x 15% = £750.
b – UK tax on overseas income £800.

DTR lower of a and b that is £750.

 

Deduction relief

Lastly, there is another method claiming relief by directly deducting the tax suffered from Income earned and pay tax on the remaining in the UK.

Using the above example Amrita can just add £5000 minus £1000 = £4000 as interest income to her tax return and pay tax on it. See example 5 in Help sheet 263.

 

Note:

Tax payer is free to choose whichever method is most beneficial to them.

 

Which exchange rate should be used to convert the income from foreign currency income to GBP?

If the sums involved are material, take the exchange rate for the day on which the interest is credited in client’s bank account, if sums are not material then go for average rates.

HMRC publishes exchange rates, see link

 

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