Home |Tax returns filing | If I make a deposit under the Premium Rupee Plan (PRP) in a bank, they usually debit money from our NRE (Non-Resident External) accounts and buy equivalent amount of forex, and make FCNR (Foreign Currency Non-Resident) deposit for, say, five years. The interest earned this way is around 3.5%. How will taxation apply if I become a resident after 1-2 years, and given this instrument will mature five years from now?

If I make a deposit under the Premium Rupee Plan (PRP) in a bank, they usually debit money from our NRE (Non-Resident External) accounts and buy equivalent amount of forex, and make FCNR (Foreign Currency Non-Resident) deposit for, say, five years. The interest earned this way is around 3.5%. How will taxation apply if I become a resident after 1-2 years, and given this instrument will mature five years from now?

Deepti
Answered on February 07,2020

The Reserve Bank of India (RBI) regulations require that you intimate change in your residential status to the bank where you hold an NRE (Non-Resident External) or FCNR(Foreign Currency Non-Resident) account. Upon change of your residential status from NRI to resident, the interest income earned from an FCNR deposit shall become taxable.

Interest earned from FCNR account continues to be exempt so long as you are NRI or Resident but Not Ordinarily Resident (RNOR), as per the income tax law. You must check your residential status for each financial year immediately after your return and pay tax on the interest income from FCNR deposits, in case you become a resident in India for income tax purposes.

The interest income is spread over five years. As for offering the income to tax, you can opt for accrual or cash basis. Once you become a resident of India and choose to offer income on cash basis, the entire interest component that you receive must be offered to tax in the year of maturity (provided you qualify as a resident). If you have chosen to offer your income on accrual basis, the interest pertaining to the year in which the instrument matures alone needs to be offered to tax.

Related Questions