Tax rules for NRI children earning interest in India
What's the story
When Indian-origin children move abroad and become Non-Resident Indians (NRIs) for tax purposes, their income earned in India comes under the scrutiny of Indian tax authorities. This includes interest on bank accounts.
The taxation of this interest income depends on several factors, such as the type of account, the residency status of the child, and whether it is clubbed with that of a parent.
Account types
Type of bank account matters
In India, there are different types of bank accounts for residents and non-residents.
When a child becomes an NRI, their regular resident savings account must be converted into either a Non-Resident Ordinary (NRO) or Non-Resident External (NRE) account.
Interest earned on NRO accounts is taxable in India, while interest on NRE or FCNR accounts is tax-free if the account holder is an NRI as per the Income Tax Act.
Tax implications
Tax rate on NRO accounts
Interest earned on NRO accounts is treated as income arising in India and taxed at a flat rate of 30%, subject to applicable surcharge and cess.
The tax is deducted by the bank before it is credited to the account.
However, the actual tax liability could be lower depending on the child's overall income and tax laws in their country of residence.
Minor taxation
If the child is a minor
If the NRI child is a minor (under 18 years), Indian taxation norms add another layer of complexity.
The income of a minor is usually clubbed with that of the wealthier parent, except where it accrues from their own manual work or special skills.
In most cases, an NRI minor's bank interest income would be added to the parent's taxable income in India and taxed accordingly.
Tax relief
Benefits under Double Taxation Avoidance Agreements (DTAA)
NRIs can avoid double taxation by availing benefits under Double Taxation Avoidance Agreements (DTAAs) between India and other countries.
If the NRI child is also paying tax in their country of origin, they can claim credit for tax paid in India.
To avail the DTAA benefit, one has to submit documents like a Tax Residency Certificate (TRC), Form 10F, and a declaration to the bank in India.
Compliance requirements
Importance of reporting interest income
Even if the child only earns interest in India, it has to be reported in their Indian return (if applicable) or the parent's return under the clubbing of income.
Failure to do so could result in penalties or inquiries by the Income Tax Department.
Hence, parents and guardians must understand the rules regarding residency, account type, and tax treaty benefits before making any financial decisions.