Should NRE deposits be reported in ITR?
—Name withheld on request As per the Income-tax Act , interest received from NRE account is exempt from taxes for an individual, till the time the individual qualifies as person resident outside India (PROI) under the provisions of the Foreign Exchange Management Act, 1999 (Fema) or is a person who has been permitted by RBI to maintain the said account. As per Fema, person resident in India (PRII) means a person who was residing in India for more than 182 days during the preceding financial year but excludes a person who stays outside India for employment/ business/ for uncertain period or a person who comes to stay in India, otherwise than for above purposes.
Any person who does not qualify as PRII, is a PROI. Further, as per Fema, NRE accounts should be redesignated as resident accounts immediately upon the return of the account holder to India for taking up employment.
Hence, subject to the above rules, there is a view that once a person returns to India for employment, and becomes a PRII, the interest exemption under the IT Act may be available only till the time the individual was a PROI and/ or is permitted to maintain the said deposit account as per Fema. Timing of taxation, i.e., whether on yearly accrual or upon maturity, would depend upon the method followed by the individual (i.e.
whether cash or mercantile), on a regular basis for offering income under the head “other sources". A view prevails that interest earned till the period individual qualified as PROI shall continue be exempt from tax even if the method of accounting is on cash basis, while litigation in this regard cannot be ruled out.
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