NRO deposits to be treated as investment income: AAR
March, 07th 2008
Giving a boost to investments by non-resident Indians, the Authority for Advance Rulings (AAR) has said that non-resident ordinary (NRO) deposits should be treated as investment income and taxed at 20%.
At present, banks consider such deposits as interest income or income from other sources and deduct tax at source at the rate of 30%.
NRO accounts are the same as savings account for resident Indians but are so designated on change of residence. The interest rate for such deposits is at about 9% per annum.
The ruling comes in the case of V Ravi Narayanan, an NRI living in Saudi Arabia who wanted to open an NRO account in HDFC Bank. The AAR held that since the NRO deposit would be made by the applicant with convertible foreign exchange in a banking company which was not a private company, it would be treated as 'foreign exchange asset'. The income through interest earned from the deposit would be treated as investment income under Section 115 C of the Income-Tax Act and would be taxed at 20%.
The authority also said banks paying interest on the NRO deposit of the applicant were required to deduct tax at source at the rate of 20%.
The judgement is, however, on a case basis and experts say it can be appealed in a higher court. An executive with a public sector bank said there would not be much impact on banks. "Our job is only to deduct taxes and pass it on to the government. The rate at which tax is deducted does not really affect us." However, others said this might promote opening of more such NRO deposits.