Under the provisions of Section 10(4)(ii) of the Income Tax Act interest on money standing to credit of a person resident outside India or any person who has been permitted by the Reserve Bank of India to maintain the N.R. (External) A/C in a Non-resident (external) Account in any bank in India in accordance with the Foreign Exchange Regulation Act 1973 and now under the Foreign Exchange Management Act, 1999 (regarding FEMA), and any rules made there under is completely exempt from income tax. Hence, as the law stands today the entire income from NRE account and FCNR accounts earned by NRIs will be fully exempted from income-tax. For the purposes of this provision the expression “person resident outside India” is to be distinguished from a non-resident. The expression “person resident outside India” is defined in Section 2(w) of the Foreign Exchange Management Act 1999, as a person who is not resident in India.
Section 2(v) of the Foreign Exchange Management Act 1999, defines the term “person resident in India”. According to this definition a “person resident in India” means:
- a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—
- a person who has gone out of India or who stays outside India, in either case—
- for or on taking up employment outside India, or
- for carrying on outside India a business or vocation outside India, or
- for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.
- a person who has come to or stays in India, in either case, otherwise than—
- for or on taking up employment in India, or
- for carrying on India a business or vocation in India, or
- for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.
- any person or body corporate registered or incorporated in India.
- an office, branch or agency in India owned or controlled by a person resident outside India.
- an office, branch or agency outside India owned or controlled by a person resident in India.
Non-resident Indians generally fall under the following broad categories:
- Indian citizens who stay abroad for employment or for carrying on business or vocation or any other purpose in circumstances indicating an indefinite period of stay outside India.
- Indian citizens working abroad on assignments with foreign governments/government agencies or international/regional agencies like the United Nations (including its affiliates), International Monetary Fund (IMF), World Bank (IBRD), etc.
- Officials of the Central and State governments and public sector undertakings deputed abroad on temporary assignments or posted to their offices (including Indian Diplomatic Missions) abroad.
The non-resident Indian becomes resident of India only when he comes back to the country for employment or for carrying on in India any business or vocation or for any other purpose indicating an indefinite period of stay in India. He is not regarded as a person resident in India during his short visits to India, say, for holidays, business visits, etc. Indian citizens who take up jobs on completion of their higher studies abroad are regarded as non-residents only from the time they take up jobs abroad.
It should be noted carefully that this exemption is given not to a nonresident as understood under the Income Tax Act but to a person resident outside India. From a practical point of view and in most of the cases a person resident outside India under the fema and a non-resident person as per the Income Tax Act would be the same. However, in certain cases a person may be resident outside India as per fema but he may not be nonresident in India as per I.T. Act. Likewise, a person may be non-resident in India but he may not be a person resident outside India. This distinction should be carefully followed by a non-resident Indian. However, from practical point of view a non-resident Indian who is generally staying outside India, is regarded as a person resident outside India and is entitled to open a Nor-resident (External) Account Where such an account can be opened in the name of a non-resident Indian because he is regarded as a person resident outside India he would be entitled to this exemption in such a manner that the entire amount of interest on money standing to his Non-resident (External) Account would be completely exempt from income tax.