Foreign exchange asset treatment for NRO deposits extends concessional tax and TDS rates to the resulting interest income.

An NRO deposit acquired with convertible foreign exchange in a banking company that is not a private company qualifies as a foreign exchange asset under section 115C, because repatriability is not a statutory condition for that definition. Interest earned on that deposit is income derived from the foreign exchange asset and therefore counts as investment income under section 115C, attracting tax at 20% under section 115E. For the same reason, tax at source on such interest is deductible at 20%, and the higher rate applicable to ordinary income does not apply.

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Issues: (i) Whether an NRO deposit made with convertible foreign exchange in a banking company not being a private company is a foreign exchange asset under section 115C; (ii) whether interest on such NRO deposit is investment income under section 115C and taxable at 20% under section 115E; and (iii) whether tax at source is deductible at 20% on such interest.

Issue (i): Whether an NRO deposit made with convertible foreign exchange in a banking company not being a private company is a foreign exchange asset under section 115C.

Analysis: Section 115C defines a foreign exchange asset as a specified asset acquired with convertible foreign exchange. The provision does not require the asset to be freely repatriable. A deposit with a banking company that is not a private company falls within the statutory description of a specified asset, and the restriction on repatriation of an NRO account does not take it outside the definition.

Conclusion: Yes. The NRO deposit is a foreign exchange asset under section 115C.

Issue (ii): Whether interest on such NRO deposit is investment income under section 115C and taxable at 20% under section 115E.

Analysis: Investment income means income derived from a foreign exchange asset. Once the NRO deposit qualifies as a foreign exchange asset, the interest earned on it is income derived from that asset. Section 115E therefore applies the special rate of tax to such investment income.

Conclusion: Yes. The interest is investment income under section 115C and is taxable at 20% under section 115E.

Issue (iii): Whether tax at source is deductible at 20% on such interest.

Analysis: Since the interest is investment income chargeable under the special regime applicable to non-resident Indians, the corresponding TDS provisions must reflect that character and rate. The higher rate applicable to ordinary income does not govern this interest payment.

Conclusion: Yes. The banks are required to deduct tax at source at 20%.

Final Conclusion: The applicant succeeded on the substantive questions, and the ruling recognized the NRO deposit, the resulting interest income, and the applicable source deduction rate as falling within the special concessional regime for non-resident Indians.

Ratio Decidendi: Under Chapter XIIA, repatriability is not a condition for a deposit acquired with convertible foreign exchange to qualify as a foreign exchange asset, and interest derived from such an asset is taxable as investment income at the special rate prescribed for non-resident Indians.

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