Introduction
For NRIs wanting to maintain financial connections with their homeland, fixed deposits offer an attractive investment avenue with varying features and tax consequences. These specialised deposit accounts are designed to accommodate the unique financial needs of NRIs while navigating the complexities of international taxation effectively. Understanding the various types of NRI fixed deposits and their respective tax implications is crucial for making informed investment decisions and optimising returns in accordance with one's residency status.
Types of NRI Fixed Deposits and Their Tax Benefits
1. GIFT City Offshore Fixed Deposits
With the implementation of the operations of International IFSC Banking Units (IBU), multiple Indian banks have set up operations in GIFT City. Like their Indian counterparts, they offer a common savings instrument, such as a fixed deposit. These deposits are denominated in 14 other international currencies like the US Dollar, the Euro, and the UAE Dirham. They are meant for NRIs and international investors, letting you invest in foreign currency with competitive interest without risk of currency depreciation.
Tax implications: Gift City Fixed Deposits are exempt from income tax in India. The legal framework of GIFT City, established by the Parliament of India, designates it as an offshore territory. There is no corresponding applicable Tax Deducted at Source (TDS) either.
2. Foreign Currency Non-Resident (FCNR) Deposits
FCNR deposits are a special savings instrument set up by the Reserve Bank of India to allow NRIs to invest their foreign earnings in India in a foreign currency, i.e. without conversion into Indian Rupees. This is designed to protect these investments from the risk of currency fluctuations, as the Indian Rupee is a depreciating currency (when compared to most major global currencies).
They also provide ease of access and flexibility as they are fully repatriable (i.e. both principal and interest), without any restrictions, to your foreign country of residence.
Tax implications: The interest earned on FCNR deposits is tax-free in India, making them a popular investment choice for NRIs looking to grow their foreign earnings at globally competitive interest rates. Again, there is no TDS applicable to FCNR deposits.
Before filing taxes, review our DTAA checklist to avoid double taxation as an NRI.
3. Non-Resident External (NRE) Fixed Deposits
NRE FDs are one of the most ubiquitous savings instruments in any NRIs Indian investment portfolio. These FDs are denominated in Indian Rupees and allow NRIs to transfer their foreign earnings to India and earn a high rate of interest in Indian Rupees.
Also Read:
NRO Fixed Deposits: Manage your Indian earnings efficiently with secure deposits.
NRI Fixed Deposits in GIFT City: Enjoy tax benefits and competitive interest rates.
They are a popular option for NRIs looking to eventually move back to India and use these savings to fund their retirement. Similar to FCNR deposits, money saved in NRE FDs is also fully repatriable abroad.
Tax implications: Since NRE accounts are by definition considered to be outside India, the interest earned on NRE FDs is tax-free in India. There is no TDS either.
4. Non-Resident Ordinary (NRO) Fixed Deposits
NRO accounts are designed to help NRIs save and invest their Indian income, such as rent and dividends, within India. The associated NRO FDs are also denominated in Indian Rupees, and funds in these deposits have a repatriation limit (currently up to USD 1 million in a financial year).
Tax implications: The interest earned on NRO FDs is fully taxable in India as per the applicable tax slab. TDS is deducted @30% plus applicable surcharge and cess. Any excess TDS deduction can be claimed as a refund by filing your Income Tax Return (ITR) for the corresponding financial year.
TDS on NRI Fixed Deposits: Rates, Rules & How to Save Tax
While GIFT City Offshore FDs, FCNR deposits, and NRE FDs are exempt from income tax in India, it is important to check the corresponding and applicable tax laws in your country of residence, to ensure compliance in both countries.
NRIs can claim a refund of excess TDS deducted on NRO FDs in the two following cases:
If your total taxable income in the financial year falls below the basic exemption limit of INR 2,50,000
If you are eligible for a lower tax rate as per the Double Taxation Avoidance Agreement (DTAA) between India and your country of residence.
To claim a refund of excess TDS deducted on NRO FDs, NRIs need to file an Income Tax Return (ITR) in India within the stipulated timeline. Here are the simple steps to follow:
Register on the Income Tax e-Filing Portal by providing your name, date of birth, and PAN.
Choose the appropriate ITR form (ITR-2 for NRIs having only salary or pension income, and ITR-3 for NRIs having business income or income from professional services)
Fill out the ITR form by providing all the relevant details, and submit it to claim a refund. Then follow the verification process to complete the submission.
If you are eligible for a lower TDS rate under DTAA between both countries, ensure to declare the same in your ITR to claim a refund with the relevant documents such as tax residency certificate, TDS certificate, etc.
While processing the ITR, the Income Tax Department verifies your claims, and the refund will be credited directly to your bank account.
How does DTAA Help NRIs Save Tax on FD Interest?
Double Taxation Avoidance Agreements (DTAAs) can significantly reduce the tax burden for NRIs on their fixed deposit interest income. Here's how these agreements work to their advantage:
1. Reduced TDS Rates with DTAA:
Without a DTAA, NRIs face a high 30% TDS rate (plus applicable surcharge and cess) on interest earned from NRO fixed deposits. However, with a DTAA in place:
The applicable TDS rate is often reduced to 10-15%, depending on the specific agreement between India and the NRI's country of residence
Some countries like UAE have extremely favorable DTAAs, potentially reducing the rate further
This immediate reduction in withholding tax improves cash flow and overall returns
2. Tax Credit Mechanism Explained:
DTAAs prevent the same income from being taxed twice through a tax credit system:
NRIs can claim a credit in their country of residence for taxes already paid in India
This effectively means they only pay the higher of the two tax rates, not both rates combined.
For example, if an NRI pays 15% tax in India and their home country's tax rate is 20%, they would only need to pay an additional 5% in their country of residence.
3. Steps to Avail DTAA Benefits:
To benefit from lower TDS rates under DTAA, NRIs need to:
Submit a Tax Residency Certificate (TRC) from their country of residence
Provide Form 10F with additional details not covered in the TRC
Submit PAN card details to the bank where the fixed deposit is held
Complete Form 15G/15H (if applicable in special cases)
For NRIs, particularly those residing in countries with higher local tax rates, these agreements are essential financial planning tools that can substantially improve the after-tax returns on their Indian fixed deposit investments.
Country-Specific DTAA Benefits
The tax advantages vary significantly depending on the specific DTAA:
- Singapore DTAA: Reduces interest TDS to 15%
- USA DTAA: Typically offers a 15% rate on interest income
- UK DTAA: Provides for a 15% tax rate on interest
- UAE and some other Middle Eastern countries: May offer rates as low as 0-10%
For NRIs, particularly those residing in countries with higher local tax rates, these agreements are essential financial planning tools that can substantially improve the after-tax returns on their Indian fixed deposit investments.
How to File Tax Returns for NRI Fixed Deposit Interest in India
Filing tax returns for interest earned on NRI fixed deposits varies depending on the deposit type and your country of residence. Here's a comprehensive guide (with country-specific information):
For NRO Fixed Deposits:
Form ITR-2: NRIs must file using ITR-2 if they have NRO interest income
Reporting Requirements:
Declare interest income under "Income from Other Sources"
Provide bank account details where interest was credited
Report TDS details from Form 26AS
TDS Reconciliation: Cross-verify TDS deducted (usually 30% or DTAA rate) with Form 26AS
Filing Deadline: July 31st for non-audit cases (extended occasionally)
For NRE/FCNR Fixed Deposits:
Reporting Obligation: Not required to be reported in Indian tax returns as they're tax-exempt in India
Form Selection: If filing returns for other Indian income, NRE/FCNR interest need not be included
General Tax Filing Tips for NRIs
Maintain Records: Keep statements showing interest credited and TDS deducted
DTAA Forms: Submit necessary forms annually to your bank to avail lower TDS rates:
Tax Residency Certificate from your country
Form 10F
PAN details
Self-declaration of beneficial ownership
Online Filing: Most countries now require the electronic submission of tax returns
Professional Assistance: Consider consulting a tax professional familiar with international taxation
Remember that tax laws change frequently, and your specific situation might have additional requirements depending on your residency status and the exact nature of your investments.
Strategies to Optimise NRI Fixed Deposit Taxation
Strategic Deposit Structuring
1. Prioritise Tax-Free Options:
- Consider GIFT City offshore deposits, which enjoy tax exemptions in India.
- Choose NRE and FCNR deposits over NRO deposits when investing foreign-earned income.
- Plan your deposits across different types based on repatriation needs and tax efficiency.
2. Split Deposits Strategically:
- Maintain smaller individual deposits to potentially stay below tax reporting thresholds in your country of residence.
- Distribute deposits between family members to utilise individual tax exemptions and lower progressive tax brackets.
Tax Treaty Optimisation
1. DTAA Benefit Maximization
Ensure proper documentation (TRC, Form 10F) is submitted annually to avail reduced TDS rates.
Submit Form 15CB/15CA when repatriating funds to ensure DTAA benefits apply.
2. Timing of Repatriation
Schedule repatriation to coincide with favorable exchange rates.
Consider tax year implications when transferring large sums (avoid creating a large taxable event in a single tax year).
Structure and Timing Strategies
1. Interest Payout Planning
Choose quarterly compounding over annual compounding for NRE/FCNR deposits to maximise returns.
For NRO deposits in high-tax countries, consider opting for cumulative deposits where interest is paid at maturity to defer tax liability.
2. Maturity Planning
Time your FD maturities to match your financial goals and tax situations
Consider breaking deposits strategically across tax years to manage your tax bracket
Conclusion
Despite all of this information being readily available, always consult with a tax professional who is familiar with both Indian tax laws and those in your country of residence before implementing these strategies, as individual circumstances and changing regulations can significantly impact their effectiveness. Happy investing!
