2008 (12) TMI 18 - AAR - Income Tax

Non-resident Indian citizen - Non-Resident Ordinary Rupee Accounts (NRO accounts) with SBI through convertible foreign currency remittances held that income from above investment shall be taxed @ 20% plus applicable surcharge & cess - After his return to India, the applicant can invoke s. 115H until conversion of his NRO account into rupee account - Until conversion, income from NRO account shall be segregated from other income of the applicant and subjected to tax @ 20% plus surcharge & cess

Issues Involved:
1. Taxability of investment income from NRO deposits at a concessional rate.
2. Continuation of concessional tax rate after the applicant becomes a resident.
3. Segregation of interest income from NRO accounts from other Indian income.
4. Eligibility to deposit foreign currency in NRO accounts upon return to India.

Detailed Analysis:

Issue 1: Taxability of Investment Income from NRO Deposits at a Concessional Rate
The applicant, a non-resident Indian, sought clarification on whether the investment income derived from NRO deposits made with State Bank of India (SBI) through convertible foreign currency would be taxed at a concessional rate of 20% plus applicable surcharge and cess under Sections 115-A/115-E read with Sections 115-C and 115D of the Income Tax Act. The Authority confirmed that the interest income from NRO accounts opened with convertible foreign exchange qualifies as 'investment income' and is subject to a concessional tax rate of 20% as per Section 115E. This is consistent with the previous ruling in the case of V. Ravi Narayanan, where it was established that deposits made in convertible foreign currency in a banking company would be considered 'specified assets' under Section 115C(f).

Issue 2: Continuation of Concessional Tax Rate after Becoming a Resident
The applicant inquired whether the concessional tax rate of 20% would continue to apply to the NRO deposits after he becomes a resident upon his return to India, by complying with the procedural requirements under Section 115-H. The Authority clarified that under Section 115H, a person who was a non-resident Indian and later becomes a resident can continue to avail the concessional tax rate on income from specified assets by furnishing a declaration to the assessing officer along with the return of income. This benefit continues until the NRO account is converted into a resident rupee account as per RBI regulations.

Issue 3: Segregation of Interest Income from NRO Accounts from Other Indian Income
The applicant sought confirmation that the interest income from NRO accounts would not be clubbed with other Indian income and would continue to be taxed at 20% under Section 115H if he opts for the gross tax rate without any deductions. The Authority confirmed that as long as the NRO account remains designated as such by the RBI, the interest income from these accounts will be segregated from other income and taxed at the concessional rate of 20%. This segregation is mandated by Section 115D, which specifies that no deductions are allowed in computing the investment income of a non-resident Indian, and such income must be taxed separately.

Issue 4: Eligibility to Deposit Foreign Currency in NRO Accounts upon Return to India
The applicant questioned whether he could continue to deposit foreign currency in NRO accounts after returning to India until he becomes a resident. The Authority noted that the ability to open or maintain NRO accounts after returning to India is subject to the prevailing regulations and instructions of the RBI. According to the RBI's Master Circular No. 03/2007-08, NRO accounts may be re-designated as resident rupee accounts when the account holder returns to India for an uncertain period. Therefore, the applicant's eligibility to open new NRO accounts or continue existing ones would depend on the RBI's regulations at the relevant time.

Conclusion:
1. The income from existing NRO deposits with SBI will be taxed at 20% plus applicable surcharge and cess.
2. After returning to India, the applicant can invoke Section 115H to continue the concessional tax rate until the NRO account is converted into a rupee account as per RBI regulations.
3. Interest income from NRO accounts will be segregated from other income and taxed at 20% plus applicable surcharge and cess until conversion.
4. The ability to open new NRO accounts after returning to India will depend on the prevailing RBI regulations at the time.

(Pronounced in the open Court of the Authority on this 17th day of December, 2008.)

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