Should NRE deposits be reported in ITR?

My son was employed in the US before moving back to India in October. He had invested in bank NRE deposits with terms ranging from one to three years while he was in the US. He is now working with an Indian company. The NRE deposits are yet to mature. Will the interest accrued in each financial year be taxable on maturity? Does he need to report these accounts in his ITR from next year?

—Name withheld on request

As per the Income-tax Act , interest received from NRE account is exempt from taxes for an individual, till the time the individual qualifies as person resident outside India (PROI) under the provisions of the Foreign Exchange Management Act, 1999 (Fema) or is a person who has been permitted by RBI to maintain the said account.

As per Fema, person resident in India (PRII) means a person who was residing in India for more than 182 days during the preceding financial year but excludes a person who stays outside India for employment/ business/ for uncertain period or a person who comes to stay in India, otherwise than for above purposes. Any person who does not qualify as PRII, is a PROI. Further, as per Fema, NRE accounts should be redesignated as resident accounts immediately upon the return of the account holder to India for taking up employment.

Hence, subject to the above rules, there is a view that once a person returns to India for employment, and becomes a PRII, the interest exemption under the IT Act may be available only till the time the individual was a PROI and/ or is permitted to maintain the said deposit account as per Fema.

Timing of taxation, i.e., whether on yearly accrual or upon maturity, would depend upon the method followed by the individual (i.e. whether cash or mercantile), on a regular basis for offering income under the head “other sources”. A view prevails that interest earned till the period individual qualified as PROI shall continue be exempt from tax even if the method of accounting is on cash basis, while litigation in this regard cannot be ruled out.

As for reporting accounts in ITR, as per the requirements of the ITR forms (as currently applicable for Assessment Year 2023-24), all savings/ current accounts held by an individual are required to be reported in the “Bank accounts” section of the ITR form. In case he holds only NRE time deposits and not a savings/ current account, the same would not be required to be reported in this section. The NRE deposits may, however, need to be reported in Schedule AL under “Financial Assets” (if the same is applicable). All the incomes from the NRE deposits (even if exempt income) would be required to be reported appropriately in the relevant section of the tax return form.

As per the provisions of Fema, NRE accounts should be redesignated as resident accounts, or the funds held in these accounts may be transferred to the RFC accounts at the option of the account holder immediately upon return to India for taking up employment. Hence, your son would be required to notify the bank and have the said account/deposits redesignated, as appropriate at the earliest.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.