Tax planning is not just about compliance and paying your dues. Another key aspect is planning your investments in a way that allows you to optimize your post tax return. Tax planning can get even more complicated for NRIs with the multitude of Indian, foreign and DTAA (Double Taxation Avoidance) regulations one needs to account for. The various categories of term deposits (commonly referred to as fixed deposits) form an important part of a typical NRI investment portfolio in India. When choosing between NRE FDs, NRO FDs, FCNR deposits, and now the new GIFT City FDs, understanding the tax implications plays a key role in decision making.

Tax implications of different types of NRI term deposits

1. GIFT City Offshore Fixed Deposits

With the operationalization of International IFSC Banking Units (IBU) of multiple Indian banks in GIFT City (Gujarat), the IBUs have set up a novel savings instrument, the GIFT City Offshore FD. These deposits are denominated in globally accepted currencies like the US Dollar, Euro, and UAE Dirham. They are targeted at an international clientele, including NRIs, allowing you to invest in any major foreign currency while enjoying competitive interest rates in the stable Indian banking environment.

Tax implications: Since the legal framework of GIFT City established by the Parliament of India designates it as an offshore territory, Gift City FDs are exempt from income tax in India. 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 setup 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.

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. 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.

Tax refund process for NRIs

While GIFT City Offshore FDs, FCNR deposits, and NRE FDs are exempt from income tax in India, it is important to check the corresponding 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 cases below:

  • If your total taxable income in the financial year falls below the basic exemption limit of INR 2,50,000, or
  • 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:

  • 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, submit the form to claim a refund, and 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.

Conclusion

Taxes can have a significant impact on the net earnings from your investments. Understanding the tax benefits of each deposit option can help you make more informed decisions to optimize your post tax returns.