created by
Rajesh Dhruva
THANKS - Hon.Finance Minister,Sir! Our Memo.re:TDS finds favour & Compies of various Memorandams
6th Feb. '06
Shri P. Chidambaram,,
Honorable Finance Minister,
Ministry of Finance,
New Delhi.
Respected Shri P.Chidambaram,
Sub : Anomalies re: tax exemption of NRE & FCNR accounts of NRIs.
Good Wishes and wishing you a very happy year 2006.
While critically examining the provisions of Section 10(4)(ii) of the Income Tax Act, 1961 , whereby income-tax exemption is granted to Non Resident Indians on interest earned on moneys in a Non-Resident ( External ) Account and Foreign Currency Non Resident ( FCNR ) deposits held in any bank in India , serious anomalies are noticed in the Income-Tax Provisions and Foreign Exchange Regulations.
Said anomalies defeat the intention of the Statute and result in tax exemption not being available to NRIs on the interest earned on NRE and FCNR accounts since 1st day of June, 2000 , when Foreign Exchange Management Act , 1999 (FEMA) replaced the earst-while law of Foreign Exchange Regulations Act, 1973 (FERA)The same are detailed herein
The anomalies are detailed herein with remedial suggestions . If any clarifications are needed , I will be happy to provide assistance to the best of my ability.
I once again request you to kindly look into the matter and if thought proper, request for appropriate corrections.
Thanking you in anticipation.
Sincerely,
RAJESH H DHRUVA
Chief Executive
nribanks.com
Tel. No. : 0091 281 2464099 / 2463367
Cell : 0091 98240 49944
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NRE / FCNR interest not Tax Exempt !
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1. Interest on Non Resident External ( NRE ) and Foreign Currency Non Resident ( FCNR ) deposits is exempt from Income Tax in India.
2. Said exemption is granted vide provisions of Section 10(4) (ii) of the Income Tax Act Act, 1961 ( I.T. Act ) [ Annex. 1 ]
3. Said section states as under :
" In the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 ( 46 of 1973 ) and the rules made thereunder :
Provided that such individual is a person resident outside India as defined in clause (q) of Section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account " .
4. Now, a critical study of the section shows that the exemption is granted as regards interest on moneys in NRE A/c in India in accordance with Foreign Exchange Regulation Act, 1973 ( FERA ) and rules made thereon.
.02 The Foreign Exchange Regulation Act, 1973 is repelled and has been replaced by Foreign Exchange Management Act, 1999 ( FEMA ) with effect from 1st June 2000.
5. THUS, since 1st June 2000, Non Resident External A/cs are maintained and governed by the provisions of Schedule-1 of Foreign Exchange Management ( Deposit ) Regulations, 2000 and
Foreign Currency Non Resident A/cs are maintained and governed by the provisions of Schedule-2 of Foreign Exchange Management ( Deposit ) Regulations, 2000.[ Annex. 2 ]
6. AS SUCH, presently NRE and FCNR A/cs are not maintained under FERA 1973 but are maintained under the Foreign Exchange Management Act, 1999 ( FEMA ) and further governed by Foreign Exchange Management ( Deposit ) Regulations, 2000.
7. WHEREAS , the exemption under Section 10(4)(ii) continues to exempt interest earned on NRE A/c maintained in accordance with FERA 1973.
8. HENCE it can be concluded that NRE A/cs not being maintained under FERA 1973 and further more as the tax exemption under Section10(4) (ii) is granted / related to NRE A/cs maintained under FERA 1973, it is imperative that interest earned on NRE and FCNR A/cs maintained under Foreign Exchange Management ( Deposit ) Regulations, 2000 is not exempt vide provisions of Section 10(4) (ii) of I.T. Act.
9. CONCLUSION : It can therefore be concluded that , presently , interest earned on NRE and FCNR A/cs maintained under Foreign Exchange Management ( Deposit ) Regulations, 2000 is liable to tax and not exempt income.
10. REMEDIAL SUGGESTIONS :
.01 Section 10(4)(ii) should be appropriately amended. The exemption should be linked to Non Resident External and Foreign Currency Non Resident A/cs maintained under the regulations Foreign Exchange Management Act, 1999.
.02 Such amendment should be made retrospectively , giving effect to the changes since 1st day of June, 2000.
II. MOREOVER , the exemption is granted to an individual who is determined as and covered by the definition of an NRI , i.e. ' a person residing outside India ' as per the provisions of FERA, 1973 as is evident from the language of the Proviso to Section 10(4)(ii) herein :
"Provided that such individual is a person resident outside India as defined in clause (q) of section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account;]
Appropriate changes should be made herein too in context of FERA being replaced by FEMA.
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Annexure 1 : Section 10(4) of Income Tax Act, 1961
CHAPTER III : INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME
Incomes not included in total income.
10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included
[(4) (i) in the case of a non-resident, any income by way of interest on such securities or bonds as the Central Government may, by notification in the Official Gazette67, specify in this behalf, including income by way of premium on the redemption of such bonds:
68[Provided that the Central Government shall not specify, for the purposes of this sub-clause, such securities or bonds on or after the 1st day of June, 2002;]
69[70(ii) in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the rules made thereunder:
Provided that such individual is a person resident outside India as defined in clause (q) of section 271-73 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account;]]
Following second proviso to sub-clause (ii) in clause (4) of section 10, which was inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2006, shall be omitted by the Finance Act, 2005, w.e.f. 1-4-2006:
Provided further that nothing contained in this sub-clause shall apply to any income by way of interest paid or credited on or after the 1st day of April, 2005 to the Non-Resident (External) Account of such individual;
Annexure 2 : Regulation 5 of Foreign Exchange Management (Deposit) Regulations, 2000
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Foreign Exchange Management (Deposit) Regulations, 2000 |
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Notification No.FEMA 5 /2000-RB dated 3rd May 2000 1 10 11 9 5 6 7 8 12 2 |
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[G.S.R. 388 (E)] |
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In exercise of the powers conferred by clause (f) of sub-section (3) of section 6, sub-section (2) of section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank makes the following regulations relating to deposits between a person resident in India and a person resident outside India, namely: |
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Short title and commencement. |
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These regulations may be called the Foreign Exchange Management (Deposit) Regulations, 2000. |
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ii) |
They shall come into force on 1st day of June, 2000. |
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5. |
Acceptance of deposits by an authorised dealer/ authorised bank from persons resident outside India:- |
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(1) |
An authorised dealer in India may accept deposit |
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under the Non-Resident (External) Account Scheme(NRE account), specified in Schedule 1 , from a non-resident Indian [***] |
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under the Foreign Currency (Non-Resident) Account Banks Scheme,(FCNR-B account), specified in Schedule 2, from a non-resident Indian [***]; |
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iii) |
under the Non-Resident (Ordinary) Account Scheme, (NRO account), specified in |
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HURRAY - NRE/ FCNR INTEREST TAX EXEMPTION CONTINUES |
28.02.2005 |
Dear Friends
Good wishes.
It is indeed a joyous moment, which calls for celebrations, but the credit goes to Shri P. Chidambaram. Many, many thanks to Hon'ble Minister whose action will not only regain the confidence of NRI but will go a long way in strengthening their economic ties with India.
Well, on behalf of nribanks.com and my personal behalf, we sincerely thank Shri P. Chidambaram for kindly considering the submissions made out in our Memorandum as also numerous representations of NRIs across the Globe. As made out in our Memorandum, the tax was not the issue. The issue was the possible hardship of preparing accounts, filing tax returns, assessment procedures and so on and so forth.
To summarize, it can be stated that -
.01 interest earned on Non-Resident External [NRE] Account; and
.02 interest earned on Foreign Currency Non-Resident [FCNR] Accounts; will continue to be exempt from income-tax in India.
2. It may be noted that the income-tax was leviable w.e.f. 01-04-2005 and as such, till date, no income-tax was levied.
3. NOW, as the exemption is restored, in effect, interest earned on NRE & FCNR Accountsnever becomes taxable and continues to be exempt from income-tax.
5. Similarly, interest earned on Resident Foreign Currency [RFC] Account in case of Returning-NRIs, which was exempt, was also proposed to be taxed w.e.f. 01-04-2005.
6. NOW, the said interest of RFC Account will also continue to be exempt from income-tax till the Returnee-NRI's Residential Status under the Income Tax Act remains as "Non-Resident [NR]" or "Resident but Not Ordinarily Resident [RbutNOR]".
6. It may be noted that interest earned on Non-Resident Non-Repatriable [NRNR] Account and State Bank of India's India Millennium Deposits [IMDs] was not proposed to be taxed, and hence, was tax-free and continues to be tax-free.
7. Of course, interest earned on Non-Resident Ordinary [NRO] Account has been liable to tax and continues to be.
NO DOUBT , in spite of the continuation of tax exemption, the returns/yields of Mutual Funds outperformed the interest offers on NRE/FCNR Deposits and Mutual Fund Schemes continue to offer more profitable alternatives to Savings and Deposit Accounts of NRIs.
II. As more interest earning and tax-free alternatives for INR as also Foreign currency Deposits, Mutual Fund schemes score better. These are –
II.1 INR ALTERNATIVES :
1. Fixed Maturity Plan [FMP] with assured tax-free return of app.5.75% for 16 Months tenure or the Arbitrage Fund with possible tax-free yield of 6.50% p.a. are quite attractive.as compared to
.01 NRE Savings interest 3.50% p.a.;
.02 NRE 1 to 3-year Deposit interest ranges 4.00% to 4.50% p.a.
2.Interest offered on NRE / NRO Savings interest at 3.50% stands beaten by Floating Rate Funds, app. tax-free yield of 4.75% p.a.too.
II.2 FCNR ALTERNATIVES :
1. India Millennium Deposits [IMDs]
.01 India Millennium Deposits [IMDs] being State Bank of India’s Bonds offered in Dec, 2000 and due for maturity on 30-12-2005.
.02 Yield to maturity app. 4.50% up.a.
.03 As the transaction is facilitated by Sellers’ Bankers who provide a guarantee to deliver the Bonds to the Buyer,upon receipt of the funds, the transaction of sale and purchase can be taken up at almost no risk.
.04 However, this Scheme is not open for Residents of USA and Canada.
2.Foreign Currency Deposits in Far East and Middle East –
Foreign Currency Deposits being offered by India Centric Banks at attractive rates of interest.
.02 The interest rates offered are tax-free in the Country of Deposit.
.03 The Deposit and interest are fully reparable., and
.04 The interest rates are comparatively better than interest rates offered in India,
.05 As interest rates world over are on the rise , it is appropriate to place deposits for 1 or at the most 2 years.
1 Year foreign currency deposit rates of India-centric banks in Far East and Middle East are :
- US$ 3.52% p.a. ; GBP 5.11% p.a. and Euro 2.36% p.a.
3.The yield of 3-year FCNR Deposits at US$ 3.60% p.a., GBP 4.66% p.a. and Euro 2.55% do not compare well to FMP tax-free yield of 5.75% over 16 Months, which together with Foreign Exchange Forward Cover provides yield in the range of US$ 3.80%, GBP 5.75% and Euro 2.80%.
Best wishes.
RAJESH H DHRUVA
Chief Executive
nribanks.com
Tel. No. : 0091 281 2464099 / 2463367
Cell : 0091 98240 49944