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Non-Resident (External) Account

What are the legalities involved for NRIs planning to invest in fixed deposits in a Non Resident (External) account in India? Read ahead to know the nitty-gritty.

1. My son has been working in Indonesia for over a decade. Now, he's planning to return to India. If he makes a fixed deposit in NR(E) a/c for three years, before becoming an Indian resident, would the interest on that continue to be tax-free till the maturity of the deposit?
Ashish Desai, via email

The interest on Non-Resident (External) account is fully exempt from income tax, provided, either the account holder is a resident outside India, as defined in FEMA, or a person who has been specifically permitted by the RBI to maintain the aforesaid account.

Since your son plans to return to India and settle here, he would become a resident in India within the next financial year. Tax exemption on interest, currently available, would lapse and the interest earned on the deposit in NR(E) account would be taxable in his hands.

2. My husband is working in Ireland and enjoys NRI status. He has an NR(E) account in India. Can you tell me what will happen to his NR(E) account if he decides to come back to India for taking up employment here? For how long can he maintain his NRI status?
Nethra Kannan, via email

A NRI account holder returning to India for taking up employment or for any other purpose, indicating his intention to stay in India for an uncertain period loses NRI status. He shall be a resident in India and his NR(E) account will be renamed as Resident Rupee Account or converted to RFC account, provided he is eligible for that and if he or she wants to convert the account. But if the account holder is on a short visit to India, the account will function as an NR(E) account.

For funds held in fixed deposits in NR(E) accounts, interest will be payable at the rates originally agreed upon, provided the deposit is maintained for the full term even after conversion into a resident account. Your husband can maintain the NRI status if his stay in the country is for less than 182 days in the concerned financial year, and doesn't take up employment or for any other purpose indicating his intent to stay in India for an unspecified period.