Tax Free Income of NRIs as defined by FEMA,1999


Statutory Warning:
Viewers  not  exposed to complex provisions of Law may read further at their own risk of loosing their patience & even nerves - fun unintended  as the same is provided by the statutes ! Please read on...
1.      Under the Income Tax Act, 1961 certain incomes are granted tax exemption to a Non Resident Indian, provided such NRI is  "a person resident outside India" as defined under Sec. 2(q) of Foreign Exchange Regulation Act, 1973 [FERA]

These are :
01.   Interest earned from Non Resident (External) NR(E) account by an individual - 

02.   Interest earned from Foreign Currency Non Resident (Bank)[ FCNR(B)] account by an individual.
Interest earned from FCNR a/c. by an individual  NRI

1.    Section 10(4)(ii) refers to NR(E) account in accordance with FERA ,1973 which exempts income in case of an individual who is a person resident outside India as defined vide Sec. 2(q) of the FERA.,1973.
2.    Although FERA, 1973 has been replaced by FEMA, 1999, various provisions of the Income Tax Act, 1961 and Wealth Tax Act, 1957 continue to refer / to provide exemptions to an NRI as defined by provisions of FERA, 1973.
3.      Now, under Foreign Exchange Regulation Act, 1973 FCNR(B) account was covered by the terms of Non Resident (External) Accounts Rules, 1970.
4.   Hence, in case of an individual NRI, both NR(E) rupee accounts as also FCNR(B) foreign currency deposits are exempt by virtue of provisions of said Section.
5.      It is a bit strange but an OCBs interest income from FCNR(B) deposit  was exempt vide provisions of Section 10(15)(iv)(fa).
Interest earned from NRE / FCNR technically taxable ??

1.     This brings us back to the statutory warning we started with !
Happy that by Finance Act, 2013 this anamoly has been cleared & hence now interest earned is tax free.

Is the interest on NRE / FCNR deposit technically taxable ??
STRANGE as it may sound but the matter is indeed dicey. And the reasons are technical but simple .
Section 10(4)(ii) grants exemption to interest income earned from an NR(E) account maintained in accordance with FERA ,1973
BUT presently an NRI can open and operate NRE and FCNR deposits under the Foreign Exchange Management Act, 1999 and not Foreign Exchange  Regulation Act, 1973 as specifically mentioned and provided under the said Section 10(4)(ii)
of the ITAct,1961.
Now therefore the interest being  earned on an NRE deposit maintained under FEMA ,1999 and not FERA,1973 the same is not strictly covered by the provisions of Section 10(4)(ii) of the ITAct,1961 and thus the interest is technically taxable in the hands of the NRI.