Understanding the Taxability of Money Remitted by NRIs Into Resident Indian Savings Accounts Before Converting to NRO
Money remitted by Non-Resident Indians (NRIs) into a Resident Indian Savings Account before converting it to an NRO (Non-Resident Ordinary) account within the same financial year is, in principle, not taxable. This is based on the presumption that the funds sent to India are legal income and appropriate taxes have been paid on it from the remitting country.
Legal Basis and Tax Law Principles
Under the established principles of tax law, the mere act of remitting money is generally not taxable. If taxes have already been paid on the remitted funds to a resident bank account in India, these funds will not be subject to remittance tax. It is crucial for NRIs to preserve source-of-funds documentation and tax-paid documentation to substantiate this claim, as required by tax authorities.
FEM Deposit Regulations and Compliance
In accordance with the FEMA (Foreign Exchange Management Act) regulations, it is illegal for NRIs to hold a resident savings account in India. To comply with these regulations, NRIs must either convert their resident savings account into an NRO or an NRE (Non-Resident External) account. Failing to do so can result in heavy penalties.
NRIs are advised to immediately close their resident savings accounts or convert them into NRO accounts as per the recommendation. Alternatively, they can choose to close their existing accounts and open new NRO accounts at a different bank if they wish to switch banks. It is important to inform the bank of the status change as soon as possible, although the exact time period is not defined by law.
Taxation Issues and Account Conversion
Income generated and received outside India and remitted to India is generally not taxable for NRIs. However, income that is receivable in India such as rental income from property investments, pensions, and payments towards insurance premiums or EMIs on loans taken in India must be deposited in an NRO account. Any payments made from an NRO account are subject to TDS (Tax Deduction at Source) of 30.9% plus any applicable surcharge.
Contrastingly, NRE accounts allow for the free repatriation of funds back to the resident's home country with no such tax deductions. NRE accounts are used to hold overseas earnings remitted to India, while NRO accounts hold domestic earnings. Interest earned in an NRE account is tax-free in India, whereas interest in an NRO account is subject to TDS.
Guidelines for NRO and NRE Account Differences
NRO Account: Earnings from India are parked in Rupees in an NRO account. Any interest earned on these funds is subject to TDS as mentioned above.
NRE Account: Earnings from abroad are deposited in an NRE account. There is no limit on repatriation of funds from an NRE account back to the resident's home country, and interest earned in an NRE account is tax-free in India.
To ensure compliance with tax laws and avoid penalties, NRIs should familiarize themselves with the differences between NRO and NRE accounts. By doing so, they can avoid any legal issues related to holding and transferring funds between these accounts.
For a detailed guide, please see the difference between NRO and NRE account guide.