Interest earned on deposits held in foreign currency with a scheduled bank, by a non-resident or by a person who is not ordinarily resident (RNOR) is exempt from income tax according to the provisions of section 10 (15) of the Income-tax Act, 1961 (the Act).

The exemption would be available until you are non-resident or an RNOR under the Act. You will be an RNOR if you are a non-resident in nine out of the 10 previous years or your stay in India in the seven previous years preceding the current year does not exceed 729 days.

Typically, a returning NRI would qualify to be RNOR for two years; consequently, she will be eligible to claim exemption on the interest earned from deposits in foreign currency.

Once you are considered as being ordinarily resident for income tax purposes, your global income becomes taxable in India. Your earnings from deposits in India would be chargeable to tax as per the slab rates applicable to an individual.

I am an NRI, but I will be returning to India by June. Till when can I retain my foreign currency non-resident (FCNR) and non-resident external (NRE) accounts abroad? Is money in the accounts and interest earned on them taxable?

—Bhargav Mehta

Once you become a resident of India, your existing FCNR deposits could be continued till maturity at the contracted rate of interest. However, for all purposes other than interest, such deposits will be treated as resident deposits from the date of your return to India. On maturity, these accounts are to be converted into resident rupee deposit account or resident foreign currency (RFC) account.

NRE accounts should be re-designated as resident accounts or RFC immediately upon your return to India for taking up employment or for carrying business or vocation in India or for any other purpose indicating your intention to stay in India for an uncertain period.

As such the deposits held in these accounts are not taxable unless they are received in India. Interest earned on deposits held in foreign currency with a scheduled bank by you will be exempt from tax so far as you are a non-resident or an RNOR.

Further, interest earned by you on your NRE account balances in your status as a person resident outside for exchange control purposes, will be exempt from income tax in India.