Taxation of Interest Income from NRE and FCNR Deposits for UK Residents

NRE and FCNR get tax credit even without paying taxes in India

  1. Double Taxation Avoidance Agreement (DTAA) provides for credit to be given for tax `spared` (i.e. not paid) in India under the provisions of Indian law set out in Article 24 (4)
  • This tax ‘spared’ relief is restricted to a period of 10 years from first exercised – Article 24 (5)
  • Credit for `tax spared’ is limited to the amount of tax which would otherwise have been paid under the terms of the agreement. As per UK India DTAA interest can be taxed maximum @ 15% Article 12 (2). Thus, relief restricted to 15%.
  • DTAA does not mention any certification requirements.
  • Income under sections of Indian Income Tax Act 1961 is mentioned in DTAA:
SectionsType of Income
10(4)Non-Resident (External) Account
10(15) (iv)FCNR Deposits
Other sectionsNot relevant for present scenario

Conclusion:

NRE and FCNR Deposits will get a Foreign Tax Credit Relief for tax which would have been paid in India if NRE/FCNR interest was taxable . This relief is restricted to 15% of gross interest.

Sources:

  1. Double Taxation Relief Manual DT9553
  2. International Manual INTM161270
  3. UK India DTAA Agreement – Synthesized text
  4. Source of Indian Income Tax text
  5. Institute of Chartered Accountants of India – Taxation of Non-residents 2018 version.

Bonus:

  1. Prior to 1st April 2020 dividends distributed in India were subject to Dividend Distribution tax (DDT). Indian residents did not need to pay tax on dividends, but non-residents were at a disadvantage as they could not get credit for DDT.

Now DDT has been abolished, dividend will be taxable in the hands of the shareholders.

2. Interest on Fixed Deposits – interest arises and is taxable each year as it is credited. see Example 2 on SAIM2440

3. Interest Certificate – Your bank can easily provide this certificate for individual tax years. It will make tax computations much easier.

6 thoughts on “Taxation of Interest Income from NRE and FCNR Deposits for UK Residents”

  1. Hello, Does this mean if NRE fixed deposit in India where we don’t pay any tax, we can still claim 15% tax relief in UK if NRE fixed deposit is less than 10 years? Thanks

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  2. This is not completely accurate. For instance one need to consider INR to GBP depreciation as the money you finally remit back to UK may be much less than anticipated hence this should be treated as an investment account which should be addressed by means of capital gain tax in UK. It is not justifiable to apply yearly tax on an investment account and if we might not get the same principal money back in UK (due to exchange rate fluctuation similar to fund prices) as initially deposited as currently mistreated in the UK tax assessment. Please consider this use case :

    I transfer 10K UK pounds to India which gives me 1000000 INR exchange rate 1:100, I deposit in NRE fixed Deposit Account for 3 years , I make let’s say interest of 70K INR every year. I decide to repatriate money after 3 years , lets say at the time exchange rate is 110 , that will return me 9K UK pounds of my principal + Indian INR interest converted to UK Pounds 1909 =10909 Uk Pounds, where as UK tax would have been charged on the basis 10K + 1909 = 11909 Uk Pounds and would not consider my loss due to INR depreciation. I did like to hear your thoughts.

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      1. I think we are generalising the clause in all the cases. To be honest this is a bit stupid. If the % interest accrued on the account is less than the % of currency depreciation then there are no real gains and would result in HMRC to apply taxation on losses which would not make any sense. Whoever is working with HMRC advisors is not providing enough inputs to correct this perception.

        NRE is not a “true” Foreign currency account but account where the amount is kept in Indian Rupees post transfer from the UK. The account allows to repatriate funds to UK back in Pound sterling if required but the current exchange rate on the day applies The money can not be deposited in the NRE account from India. The only reason to transfer money to NRE would be for “family maintenance/Travel” or for investment. The maintenance/personal expenditure is exempt from the tax as part of HMRC Manual CG78300 so that leaves only the “Investment” as primary reason to keep money in the account , as such it should not be treated as saving account of some kind but an investment account which truly it is therefore should fall under CGT criteria and allowance as it would make sense to work with Net value upon maturity and perhaps remittance.

        The tax on CGT is 20% ? after the personal allowance of 12200 per year , this can be further addressed with 15% maximum rate as part of DTA between India and UK.

        BTW i am not an accountant but this does not make sense to me. The only purpose of keeping money in NRE deposit is “Investment”, it is NOT a saving account in foreign currency.

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  3. BTW, NRE account and NRE Fixed deposit are two separate accounts linked to 1 customer Id. NRE account is largely used for maintenance and travel where as NRE Fixed deposit is a long term investment.

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