UK Tax on Indian (NRI) Interest Income – Double Taxation Relief

UK Tax on Indian (NRI) Interest Income – Double Taxation Relief

Many Indians resident in the UK for tax purposes, and some tax advisers, mistakenly believe that interest income arising in India is not taxable in the UK. In the February 2021 edition of Taxation magazine, Sagar Jain and myself set the record straight.

Misconceptions

Non-Resident Indians (NRIs) can benefit from savings and investment products in India geared specifically to their non-residence status. For simplicity, here we focus on non-resident external (NRE) accounts, which have always tended to offer higher rates of interest than those on offer to local residents there. This made the simple fixed-term deposits attractive.

Investors typically do not have private banking nor wealth management relationships with the banks in India, since historically NRIs have been able to secure these accounts by simply walking into local bank branches or through correspondence.

As well as higher rates of return, NRE accounts have always been attractive since they generate tax-free returns in India for investors. Read the full article here.

Summary

It?is very common among the UK’s Indian community to have cash investments in India. Those newly arriving from India to live and work in the UK as well as those who have lived here for generations are widely referred to as non-resident Indians (NRIs). This does not correspond to formal citizenship in India, Indian passport holding or Indian domicile.

Misconceptions: NRIs can benefit from savings and investment products in India geared specifically to their non-residence status. For simplicity, here we focus on non-resident external (NRE) accounts, which have always tended to offer higher rates of interest than those on offer to local residents there. This made the simple fixed term deposits attractive. Investors typically do not have private banking nor wealth management relationships with the banks in India, since historically NRIs have been able to secure these accounts by simply walking into local bank branches or through correspondence.

As well as higher rates of return, NRE accounts have always been attractive since they generate tax-free returns in India for investors. India’s Income Tax Act 1961, s 10(4b) states that: ‘In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included … in the case of an individual, being a citizen of India or a person of Indian origin, who is a non-resident, any income from interest on such savings certificates…’

This is the Indian government’s way of encouraging financial investment and economic development in India. This type of interest income has long been mistaken as non-taxable in the UK, because investors noted the income was not taxable in India and some thought it instead needed to be remitted to the UK. However, UK tax residents are subject to UK taxation on their worldwide income and gains (readers will recognise the arising basis of taxation), subject to any remittance basis claims. Add to this misconception the fact that many clients and professionals remain unaware that the double taxation convention (DTC) between the UK and India does not provide for double non-taxation. There is, therefore, widespread confusion – and an incorrect belief – that this income (arising in India) which has not been taxed in India cannot be taxed in the UK. It can and often is.

Key points

● NRIs in the UK benefit from savings and investment products which are tax-free in India.

● Many Indian UK residents and their tax advisers do not know that these are taxable in the UK.

● Under the UK-India double tax treaty, non-resident external account interest taxable in the UK can receive credit for Indian tax even if this has not been paid.

● Non-resident Indians must notify their banks that they are UK-resident so the banks do not levy withholding tax at more than the 15% tax treaty rate.

● UK tax relief under the double tax treaty is only available for ten years after it is first given.?

Practical points

Many individuals born and brought up in the UK and those who moved to the UK more than a decade ago, frequently find themselves falling foul of these rules. To avoid tax exposure in the UK (and to benefit from DTC relief), where applicable, they should consider identifying the tax payable (spared) amounts in India.

From experience, the vast majority of UK residents have mistakenly not declared this type of foreign income in the UK. We encourage such individuals and their advisers, where appropriate, to review their affairs and get them in order. Especially since many will have been earning this type of interest income for decades and will not be able to benefit from DTC relief.

With the continuous tightening of UK tax rules and the exchange of financial accounts information between more than 100 countries (including the UK and India), HMRC is now better placed to identify and pursue offshore tax irregularities. Readers will recognise HMRC’s nudge letters in this regard, which are usually sent out in batches of tens of thousands, prompting taxpayers to check their UK tax affairs and seek professional advice immediately.

Taking action in response to a nudge letter is not the same as voluntarily addressing any historic irregularities. Seeking tax advice early is invaluable because coming forward voluntarily and disclosing tax irregularities to HMRC results in less being payable overall: individuals may make ‘unprompted’ disclosures, leading to lower penalties, for example. By contrast, ‘prompted’ disclosures carry a penalty of at least 150% of any additional taxes payable - so act now or face the HMRC consequences.

Planning point: Where taxpayers have mistakenly failed to declare interest from India, an unprompted tax disclosure carries a lower penalty than a prompted one following a nudge letter from HMRC. On disclosure, do not overlook relief for ‘tax spared’.

Amit Puri

Founder of Pure Tax

[email protected] or 07747 462 731