For NRIs wanting to maintain a financial connection with India, fixed deposits offer a good avenue for investment with different features and tax consequences. There are specialised bank and deposit accounts designed to accommodate the unique financial needs of NRIs.
Understanding the different types of NRI fixed deposits and their tax implications is crucial for making informed investment decisions and optimising your returns.
Types of NRI Fixed Deposits and Their Tax Benefits
1. GIFT City Offshore Fixed Deposits
GIFT City, located in Gujarat, is India’s financial services special economic zone (SEZ). Multiple Indian banks like SBI, HDFC, ICICI, etc., and international banks like HSBC, Standard Chartered, etc. have operations in GIFT City.
These banks located in GIFT City are known as IFSC Banking Units (IBUs). 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 INR depreciation.
Compared to FCNR FDs, they offer shorter tenures and do not charge a penalty on premature withdrawal.
Tax implications: Gift City FDs are exempt from income tax in India as the FEMA treats GIFT City as an offshore territory for financial purposes. There is no corresponding applicable Tax Deducted at Source (TDS) either.
2. Foreign Currency Non-Resident (FCNR) Deposits
FCNR deposits are term deposits denominated in international currencies like the US Dollar, the Euro and the UAE Dirham, etc. These deposits are meant for NRIs to keep their foreign income in international currencies. The international denomination of these deposits protects them from INR depreciation. These accounts provide ease and flexibility as both principal and interest are fully repatriable (you can take back the entire amount to the country of your 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 INR-denominated fixed deposits. They are used by NRIs to store their foreign earnings in INR. The interest rates offered on these deposits are similar to those of the resident Indian fixed deposits.
They are a popular option for NRIs looking to eventually move back to India and use this money to start life in India. Similar to FCNR deposits, money saved in NRE FDs is also fully repatriable abroad. NRE deposits are affected by INR depreciation as the amount needs to be converted both during investment and repatriation.
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.
| Also Read: Taxation on Mutual Fund Investments for NRI
4. Non-Resident Ordinary (NRO) Fixed Deposits
NRO accounts are meant for NRIs to receive their Indian income, like rent, dividends, interest income, etc. 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 following two cases:
By filing an income tax return for the financial year
If you are eligible for a special tax rate mentioned in 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 special rate (lower 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, form 10F, 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. Special Tax Rates with DTAA:
Without a DTAA, NRIs will have to pay taxes on their interest income according to their slab. DTAA with some of the countries gives the NRI the option of using a lower tax rate. For example, the India-Canada DTAA limits the taxation of interest income to 15%. This means the Canadian NRI will have to pay 15% tax on interest income.
The rest of the amount can be claimed back while filing the IT returns.
2. 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
Fill and submit Form 10F while filing your IT returns
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.
| Also Read:
Country-Specific DTAA Benefits
The tax advantages vary significantly depending on the specific DTAA:
- Singapore DTAA: Interest income is taxed at 15%
- USA DTAA: Typically offers a 15% rate on interest income
- UK DTAA: Provides for a 15% tax rate on interest
- Canada DTAA: 15% tax on interest income
NRIs can claim these tax rates on their interest income based on their country of residence while filing their IT returns.
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 of lower TDS rates:
Tax Residency Certificate from your country
Form 10F
PAN details
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
A. 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.
3. Timing of Repatriation
Schedule repatriation to coincide with favourable exchange rates.
Consider tax year implications when transferring large sums (avoid creating a large taxable event in a single tax year).
B. Tax Treaty Optimisation
1. DTAA Benefit Maximisation
Ensure proper documentation (TRC, Form 10F) is submitted annually to avail reduced TDS rates.
C. Structure and Timing Strategies
1. Interest Payout Planning
- 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
FD Taxation: Optimising Returns
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!
