Presently, interest received on NRE Deposits by a Non Resident Indian (NRI) is exempt under section 10(4) of the Income-tax Act. However, the NRIs working and residing in advanced / western countries such as USA, UK, Australia, Canada, New Zealand, France, Germany etc. are liable for tax in the respective home countries on their global income. In this respect, the Taxation Laws in foreign countries are at par with the Law in India [Section 5(1) of the Act] which mandates that a resident in India is liable to pay tax in India on all incomes from whatever source derived.
Now, in view of FAT CA in USA and other similar Laws in other countries, such NRIs are required to declare their Indian Financial Assets and income there from in their Home Countries and pay tax thereon, irrespective of Tax Treatment extended by Indian Government to the NRIs in respect of Income from their Foreign Exchange Deposits /Financial Assets. Therefore, it makes no sense for India to continue to have provisions like Section 10(4) exempting interest income of NRIs from certain bank deposits and Government Securities as the law abiding NRIs are bound to declare such Indian Income and pay tax thereon at full rate in their respective countries of residence.
Therefore, I feel that such Income should be taxed at a reasonable rate, say between 10-15%, so that the Tax Revenue is reasonably shared between the source country(i.e. India) and the country of NRI’s residence (Home Country). The NRI would not be a loser because he would get tax credit / set off in respect of taxes paid / withheld in India against his tax liability in his Home Country.
The tax rate under various Tax Treaties signed by India prescribe tax rate between 10% to 15%. Therefore, it would be eminently feasible to levy tax on NRE deposits @ 10% without causing any additional tax burden on NRIs or causing flight of capital /NRI deposits from India. Such a levy of tax needs to be properly explained/ communicated to the NRIs.
To facilitate easy tax compliance, the Law may prescribe rate of TDS on Interest earned by NRIs (including Interest earned by them on NRO deposits) @ 10%. However, in case of those NRIs who have such Interest income below basic exemption limit, they should be entitled to submit Tax Return like any other Indian Citizen and claim various exemptions and deductions available under the Law and claim refund of TDS which should be granted expeditiously.
In this manner, India can garner substantial tax revenue from NRIs without posing any additional tax burden on the NRIs or causing flight of NRI Deposits.
Yours sincerely,
Tarunkumar Singhal
