Written by : Rajiv Singh

A Chartered Accountant in UK with 15+ years of experience in FinTech Consulting, Accounting & International Taxation. I enjoy being a Social, Foodie and Father of two young children, reachable at linktr.ee/RajivSingh.

Can Interest earned from NRE Saving or Deposit account in India be treated as UK ISA?

Rajiv Singh
Rajiv Singh, CA, FAIA

Jan 24, 2021 12:59

There are lot of tax avoidance trend going in UK with myth concept that interest earned from NRE saving or deposit account in India can be treated as UK ISA account and need not to be disclosed in personal self-assessment tax return.

Firstly lets understand two different account features then we will compare whether NRE account can be equivalence to UK ISA account.

What is NRE account in india ? (Read more: about NRE account and how it is different from NRO account?)

  1. An NRE account is a bank account opened in India in the name of an NRI (Non-resident Indians), to park his foreign earnings; whereas, an NRO account is a bank account opened in India in the name of an NRI, to manage the income earned by him in India. These incomes include rent, dividend, pension, interest, etc.
  1. NRE accounts are granted as exempt from tax under Foreign Exchange Regulation Act - FEMA , 1999 (earlier accordance with Foreign Exchange Regulation Act - FERA ,1973). Neither the balance, nor the interest earned on these accounts is taxable. The interest earned on an NRO account is however taxable at 30% according to the Income Tax Act 1961. (Read more another article, how UK resident can claim educed tax rates on interest earned from NRO bank account under DTA tax relief?).
    Gotaxfile-NRE Interest-UK ISA.png
    Now understand this Tax Exemption is given by Income Tax Act 1961 referring to another act. So, interest earned from NRE or FCNR account were technically taxable. But in order to promote foreign exchange in country, RBI (Reserve bank of india) has made this scheme regulated under power given in FEMA act 1999.

As per section 10(4)(ii) of Income Tax Act, in the case of an individual, any income by way of interest on money standing to his credit in a Non-Resident (External) NRE Account in any bank in India in accordance with the Foreign Exchange Management Act, 1999, and the rules made thereunder is exempt from tax.

Exemption under section 10(4)(ii) is available only if such individual is a person resident outside India as defined in clause (w) of section 2 of the Foreign Exchange Management Act, FEMA 1999 or is a person who has been permitted by the Reserve Bank of India (RBI) to maintain the aforesaid Account.

  1. Income from interest on balances standing to the credit of NRE Accounts is exempt from Income Tax. Likewise balances held in such accounts are exempt from wealth tax.
  1. The principle amount saved or deposited or parked in an NRE account, and the interest accumulated thereon is open to repatriation. In other words, you can transfer these amounts to a foreign bank account in case of an NRE account.
  1. Joint NRE account can only be opened with another NRI and not allowed to be with residents of India.
  1. Income originating outside India can be deposited into any of these NRE accounts. However, income originating within India can be deposited only into the NRO account. In other words, income originating within India can NOT be deposited only into the NRE account.

Change of resident status of the account holder when returning back to India:

NRE accounts should be redesignated as resident accounts or the funds held in these accounts may be transferred to the RFC accounts (if the account holder is eligible for maintaining RFC account) at the option of the account holder immediately upon the return of the account holder to India for taking up employment or for carrying on business or vocation or for any other purpose indicating intention to stay in India for an uncertain period. Where the account holder is only on a short visit to India, the account may continue to be treated as NRE account even during his stay in India.

Let's understand this above legal paragraph in simple wordings:

  1. Interest on NRE deposits is tax-exempt only as long as you are a non-resident. Upon your return to India, your NRE accounts will immediately have to be re-converted as resident accounts.
  1. Upon your return from Overseas to India, you may be able to continue to enjoy your RNOR (Residents but Not Ordinary Resident) status for the duration of that particular financial year and a maximum of up to two years after your return.
  1. Note that this depends upon the number of days you have been away from India, based on the residential status rules laid down in the Income-tax Act, 1961. Further, during this period, you will have to pay tax on any income earned by you in India. Your NRE accounts will immediately have to be re-designated as resident accounts, and interest earned on them will become taxable.

What is UK ISA account and Who can open an UK ISA?

  1. An UK ISA lets you earn interest without paying any income tax, but you are limited to how much you can put in.
  1. An ISA is a tax free savings account, which stands for individual savings account (ISA). Every tax year all residents of UK have an ISA allowance in the UK that lets you save or invest money up to a certain amount without paying tax on your returns.
  1. Your ISA allowance for the 2020/21 tax year is £20,000. The tax year runs from the 6th April to the 5th April the following year. This means you have until the 5th April 2021 to use up your ISA allowance for this tax year.
  1. When a new tax year starts you will have a brand new ISA allowance. This happens on the first day of every new tax year.
  1. If you do not use all of your ISA allowance before the end of the tax year it will be gone. You cannot carry forward any unused ISA allowance from one year to the next. You will not pay any income tax on money saved in an ISA, as long as you do not pay in more than your allowance each tax year.
  1. To open one, you need to eligible:
  • (a) Be 16 or older (18 for stocks and shares ISA)* (Note * Except for Junior ISAs.)
  • (b) Be a resident in the UK
  • (c) Have a national insurance number
  1. An ISA can only be held in one person's name. It is not possible to have an ISA in joint names.
  1. You can only pay into one cash ISA, one stocks and shares ISA and one innovative finance ISA in each tax year. You are not allowed to open another account with different bank or institution or service provider.
  1. There are some restrictions on re-deposit money after withdrawals of money from UK ISA, based on nature of account whether it is flexible or Not-Flexible. In other words, if account nature is flexible your allowances limits are not impacted, otherwise your remaining allowances will counted towards any further deposit you make in a financial year after withdrawal of funds.
  1. You can move an ISA to a new provider if they offer a better interest rate; this is called an ISA transfer in.

Now, concluding answers of this topic by above feature and comparison points below; Interest earned from NRE Saving or Deposit account in India SHOULD NOT be treated as UK ISA?

  1. Availability : NRE account only Non-residents are eligible where as UK ISA only Residents of country are eligible.
  1. Repatriation: NRE account holder in India can repatriate money to overseas, whereas you can not make direct transfer to overseas from UK ISA.
  1. Allowances limit: There is no threshold limit on amount of deposit can be made by NRE account holder in India where as UK ISA has allowances limit of deposit amount every financial year to qualify for Tax free exemption on Interest.
  1. Restriction on Number of account: A non-resident Indian can open any number of NRE account in india with multiple provider, whereas UK ISA has restriction of number of account based on types.
  1. Joint owner: NRE account can be opened by Joint account holder whereas an ISA can only be held in one person's name.

Concluding, this article by statement that there is a myth among residents in UK who are NRI (Non Residents of India) that Interest Earned on NRE account or FCNR account is Tax free in UK also. The fact is you will have to disclose all your global income in to personal self - assessment tax return and calculate tax. There is a separate article by me to learn more how you can take DEEMED Tax credit (FTCR) while adding Interest earned from NRE account in UK Tax return. You can search article "Is Interest earned from NRE / FCNR account in India Taxable in UK?".

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Rajiv Singh
Rajiv Singh, CA, FAIA

Jan 24, 2021 12:59

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