Interest Income From Deposits, Bonds Etc
India is an investment destination to earn higher rate of interest on Deposits Investments. With special liberty to NRIs and PIOs under FEMA, lots of NRIs are investing in Deposits in India. These investments generate Interest Income to NRIs. Salient features wrt interest income are as under:
Salient Features wrt Interest Income:
- Bank Deposits: These are the most popular form of Deposits Investments by NRIs, PIOs. These deposits can be in the form of Saving, Recurring or Fixed. These Bank Deposits can be either NRO or NRE. Under FEMA, there have been provided specific regulations wrt NRO and NRE Deposits. Interest Income earned on NRE Deposits is exempt under Income Tax Act Provisions. Interest Income from NRO Deposits is taxable in India.
- Bonds, Debentures etc: This is another form of deposits by NRIs. Bonds are generally issued by Govt of India or Govt of India approved companies (e.g. Public Sector Companies). One of the most invested bonds by NRIs are Capital Gain Tax Saving Bonds (issued by NHAI, REC). Interest income from these bonds is taxable. Sometimes, Govt of India also issues Tax Free Bonds, interest income of which is exempt from income tax. Debenture is another form of deposits, which is not very free kind of investments. FEMA provides certain conditions for investment by NRIs into Debentures. Investment in debentures fetches a fixed rate of interest to NRIs. Interest income from Debenture is taxable under Income Tax Act.
- Tax Computation: Interest income forms part of ‘Income From Other Sources’ Head while preparation of ITR. Interest income, from all sources, gets clubbed under this Head of Income and then gets merged with other Head’s Income into Gross Total Income.
- Deduction for Saving Bank Interest: Wef FY 2012-13, there will be a deduction available of an amount upto Rs 10,000, from Gross Total Income, if Gross Total Income includes Interest Income from Saving Bank Account. Hence, NRO Saving Bank Account Interest shall stand eligible for this deduction.
- Tax Deduction at Source (TDS): Under the TDS Provisions (u/s 195), Payer (being Bank, Company, PSU, Govt etc) is under obligation to deduct TDS before paying interest income to the NRI. As per the provisions of section 195, rate of TDS on the interest income shall be maximum i.e. 30%. This tax rate can be reduced (upto nil) by applying for TDS Exemption/Reduction Certificate with the concerned Assessing Officer, if NRI is of the view that actual total tax liability is nil or lesser. Alternatively, NRI can claim the excess TDS as IT Refund in Income Tax Return.
- Double Tax Avoidance Agreement: NRIs are tax resident of the other country i.e. where they are presently working & residing. As per the existence of a Double Tax Avoidance Agreement between India and the Other Country, NRI may seek the benefit of tax exemption in one country and also the lower rate of tax as per the rates given in the DTAA. Generally, DTAA includes an article in relation to Interest Income, which provides special rate of tax (generally @15%) on Interest Income.