NRE Account Interest Exemption Under Section 10(4)(ii)
Interest earned on a qualifying Non-Resident (External) account, commonly called an NRE account, may be fully exempt from Indian income tax under Section 10(4)(ii) of the Income-tax Act, 1961. The exemption depends on the holder's eligibility and compliance with the applicable foreign-exchange regulations.
Eligible recipient: An individual who meets the statutory non-resident condition or is permitted by the Reserve Bank of India (RBI) to maintain the qualifying account.
Qualifying income: Interest on money standing to the credit of an eligible NRE account in a bank in India.
Exemption: The full amount of qualifying interest; there is no specific rupee ceiling under this clause.
What does Section 10(4)(ii) provide?
Section 10(4)(ii) excludes from total income the interest on moneys standing to the credit of an individual in a Non-Resident (External) Account in a bank in India, in accordance with the relevant foreign-exchange law and rules. The individual must be a person resident outside India as understood under the applicable foreign-exchange framework or a person permitted by the RBI to maintain that account.
The Income-tax Act's wording refers to the Foreign Exchange Regulation Act, 1973 (FERA), while India's operative foreign-exchange regime is the Foreign Exchange Management Act, 1999 (FEMA) and regulations issued under it. The legal reference should therefore be read alongside the current RBI rules for NRE accounts; FERA should not be presented as the currently governing account-opening law.
Eligibility and conditions for exemption
- Eligible individual: The beneficial recipient of the interest must meet the non-resident condition for this provision or be allowed by RBI to maintain an NRE account.
- Correct account type: The interest must arise on funds standing to the credit of a qualifying NRE account maintained with a bank in India, not merely any Indian savings account.
- Regulatory compliance: The account must be opened, funded and maintained under the applicable RBI/FEMA rules, including account-holder eligibility and permitted credits.
- Continued eligibility: A change in residential status or account eligibility can require redesignation of the account. Interest arising after the relevant change must be evaluated under the applicable rules.
NRE, NRO and FCNR(B) accounts: tax treatment
| Account | Typical Indian income-tax treatment of interest |
|---|---|
| NRE (Non-Resident External) | Exempt under Section 10(4)(ii) when all statutory and RBI conditions are met. |
| NRO (Non-Resident Ordinary) | Generally taxable in India, subject to any applicable tax treaty relief and other provisions. |
| FCNR(B) (Foreign Currency Non-Resident Bank) | May qualify for a separate exemption under Section 10(15)(iv)(fa), subject to its own conditions. |
The exemption is account-specific and condition-specific. Holding an NRI status alone does not make interest from every Indian bank account tax-free.
What happens when an NRI returns to India?
When an account holder becomes a person resident in India under FEMA, the RBI's deposit regulations generally require NRE accounts to be redesignated as resident accounts or the funds to be transferred to an eligible account, subject to the applicable rules and exceptions. The precise date of the change and the period for which the account remained eligible matter when assessing the interest exemption.
Important distinction: Residential status under the Income-tax Act and under FEMA is determined using different tests. A person should check both, rather than assuming that one status automatically determines the other.
Example: Interest on a qualifying NRE fixed deposit
Suppose an eligible non-resident individual holds an NRE fixed deposit with an Indian bank and earns Rs. 85,000 in interest during the relevant year. If the deposit and account holder satisfy Section 10(4)(ii) and the applicable RBI rules, the entire Rs. 85,000 is exempt from Indian income tax under that provision.
If the same person earns interest on an NRO deposit, that interest does not qualify for the NRE exemption merely because the account holder is an NRI.
Documentation and tax-return considerations
- Keep bank interest certificates and statements identifying the account as NRE.
- Retain evidence of overseas residence, account eligibility and any change in residential status.
- Where an Indian income-tax return is required for other reasons, report exempt income in the appropriate schedule as required by the applicable return form and instructions.
- Review the tax rules in the country of residence: an exemption in India does not necessarily mean the interest is exempt overseas.
Official legislation and regulatory references
- Income Tax Department: Income-tax Act, 1961 - consult Section 10(4)(ii) and other applicable exemptions.
- India Code - official central legislation, including the Income-tax Act and FEMA.
- Reserve Bank of India - current FEMA deposit regulations, NRE account eligibility and account redesignation guidance.
- Income Tax e-Filing Portal - return forms, instructions and taxpayer services.
Frequently asked questions
Is all NRE account interest tax-free in India?
Interest is exempt when the account and individual meet the conditions of Section 10(4)(ii). The exemption should not be assumed where account eligibility has changed or regulatory requirements are not satisfied.
Is there an exemption limit for NRE interest?
No specific monetary ceiling applies to qualifying NRE account interest under Section 10(4)(ii).
Is interest on an NRO account exempt under Section 10(4)(ii)?
No. This provision concerns qualifying NRE accounts, not NRO accounts.
This article explains the Section 10(4)(ii) framework and should be read with the legislation, applicable RBI directions and the rules for the relevant tax year. Tax treatment may depend on individual facts and legislative changes.