Interest Earned on NRE Account or NRO Account is Taxable in U.S.
Is Interest Earned on NRE Account or NRO Account is Taxable in U.S.?
U.S. Tax on Interest Earned in an NRO & NRE
The U.S. Tax Laws involving Indian Income, FBAR Reporting and FATCA Filing can be very complex.
NRE and NRO Account
This will often include issues involving an NRI (Non-Resident Indian) who maintain either (or both) NRO (Non-Resident Ordinary Rupee Account) and NRE (Non-Resident Rupee Account). Both of these accounts are very common, with many of our clients having undisclosed accounts at institutions such as:
- ICICI NRI Account (NRE or NRO)
- HDFC NRI Account (NRE or NRO)
- SBI NRI Account (NRE or NRO)
- Axis NRI Account (NRE or NRO)
- Local Accounts with: Kotak, Bank of India, & Other Accounts
U.S. Taxation (CBT)
Under the concept of Citizen-Based Taxation, a person files taxes in the United States each year if they are considered a US person. It is important to note the distinction in the prior sentence: even though it is called Citizen-Based Taxation, it is not limited to U.S.Citizens; rather, it includes US persons (Legal Permanent Resident, H-1B, L-1, E-2, E-3, etc.)
Who is a U.S. person?
There are actually many categories and subcategories of U.S. persons. For the most part, excluding corporations and other businesses, the following individuals are considered to be a US person:
- U.S. Citizen.
- Legal Permanent Resident
- Foreign National who meets the Substantial Presence tTest
- Former Legal Permanent Resident who did not properly expatriate
For any one of the aforementioned individuals, they will have to file a US tax return each year detailing their worldwide income.
As you can imagine, this is confusing and nonsensical (read: Stupid). Why would someone who lives outside the United States and is only considered a U.S. person because they still have Legal Permanent Residency have to file an annual tax return for income solely earned in Singapore, Hong Kong, Australia, India, etc.?
Here are a few commonly asked questions we receive:
Live Outside the United States
If a U.S. person lives outside of the United States, but is still considered a US person (meets one of the above reference categories) they still have the file an annual tax return.
I already Paid Taxes Abroad
If a U.S. person already paid taxes by filing a foreign tax return or having money withheld from a foreign paycheck or account then the person may qualify for a foreign tax credit. With the foreign tax credit, the amount of taxes he or she paid abroad (using an equation) is applied to the taxes that would have otherwise been due to the United States on the foreign income received — so that the person is not paying double tax.
*It is typically not a dollar-for-dollar credit.
Income is Not Taxable Abroad
Unfortunately, this does not really matter. The IRS rarely, if ever acknowledges the tax-free status of income under the rules of foreign countries. For example, if you are earning interest income in Singapore, that interest income is still taxable in the United States.
If your foreign retirement is accruing or growing and not being being distributed, you may still have to pay tax on the accrued but not distributed in. In addition, if you are able to deduct certain contributions from yourself or your employer to a foreign retirement fund, chances are that income that the amount which was deducted for foreign income tax purposes would still need to be included in your gross income under US tax return.
India NRO Accounts
The NRO account is a “Non-Resident Ordinary Rupee Account.” This is the preferred account for individuals who do not reside in India (even if they are still Indian citizens). The main purpose for an Indian citizen/nonresident of India for opening an NRO account is that a person can use the account to manage income earned in India such as passive income or rental income. Therefore, the Non-Resident Indian can operate their NRO from outside of India (including depositing non-INR currency into the account) and provide access to the money to relatives and family in India.
Moreover, with most Indian Financial Institutions, foreign currency can be deposited into the NRO account, which will be converted into Indian Rupees, as per the prevailing foreign exchange rate.
The main features of an NRO Account are as follows:
- Nearly anyone (resident or nonresident) can open the account;
- It can be held jointly between an Indian resident and nonresident;
- It can be a savings account, current account, recurring account or fixed deposit account; and
- A certain amount of the money ($1,000,000 USD) is “Repatriable” (Can be transferred out-of-India and into a different country)
India NRE Accounts
The NRE account is popular for the simple reason that the account is usually not TDS (Not Tax Deducted at Source). In other words, while an NRO account has taxes withheld, there is no tax on the earnings generated in the NRE account (unless the individual requests the account to be TDS).
Like the NRO (at most Banks), foreign currency can be deposited into the NRE and then exchange and to rupees and/or exchange back into foreign currency at the time of repatriation. Deposits into an NRE must be done through Foreign Exchange Remittances and since the countess held in rupees it is subject to significant fluctuation risks.
The main features of an NRO Account are as follows:
- The Interest earned is not taxed;
- The Account Currency is held in Rupees;
- A resident individual can be appointed to serve as Power of Attorney (no Joint Account Holders with Indian Residents); and
- Generally, the money in the NRE is fully repatriable in foreign currency
Getting Into IRS Compliance with Offshore Disclosure
Even though you may be out of compliance and unnecessarily scared by much of the fear mongering websites you may read online, is typically very easy to get back into compliance quickly and safely.
What if You Never Reported the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.