Tax Implication on Salary earned out side India by Resident Indian as well as Interest earned on Fixed deposits - NRE

[PRIYAM KHAMBHATA]

Respected Sir

My client is employee of US based Company since long. He is doing Job in India (Work from Home) and earned Salary in USD, which is credited in US Bank Account. Subsequently, he has transferred the funds from US Bank account to NRE Bank Account operate in India for family maintenance. Further, he has also parked surplus funds in Fixed deposits - NRE and earned Interest on NRE Fixed deposit.

My Query is Whether, my client is to claim Exemption towards salary income earned in US dollar in US Bank Account, and also to claim Exemption towards interest income earned on fixed deposits (NRE) .

Please Guide me.

If possible share any circular or any case laws in favor or against for my knowledge.

 

[YAGAY andSUN]

1. Taxability of Salary Income

The taxability of salary is governed by Sections 5 and 9(1)(ii) of the Income-tax Act, 1961.

Salary is taxable in India if:

(a) it is received in India; or

(b) it accrues or arises in India; or

(c) it is deemed to accrue or arise in India.

As per Section 9(1)(ii), salary is deemed to accrue in India where services are rendered in India, irrespective of:

• place of payment,
• currency (USD), or
• location of bank account (foreign or NRE).

Accordingly, where the employee performs services from India (work from home), the salary income accrues in India and is fully taxable in India, even if credited to a US bank account and subsequently remitted.

Judicial position also supports that place of rendering services is determinative. The decision in Kaushal Ganpatbhai Patel vs ITO - 2026 (2) TMI 867 - ITAT AHMEDABAD is distinguishable, as it applies only where services are rendered outside India.

2. Interest on NRE Fixed Deposits

Exemption is governed by Section 10(4)(ii) of the Income-tax Act, 1961.

Interest on NRE deposits is exempt only if the assessee qualifies as a "person resident outside India" under FEMA.

• If the individual continues to be a Non-Resident (NRI) under FEMA Interest on NRE FD is exempt.
• If the individual becomes resident in India such exemption ceases, and interest becomes taxable.

3. Remittance to NRE Account

Transfer of funds from a foreign bank account to an NRE account does not alter the taxability of the underlying income. Taxability is determined at the point of accrual, not remittance.

4. Conclusion

• Salary earned for services rendered in India is taxable in India, irrespective of receipt outside India.
• Interest on NRE deposits is exempt only during NRI status; otherwise taxable.

No exemption is available merely on the basis of foreign receipt or NRE routing.

[PRIYAM KHAMBHATA]

Thank You very much Sir, for prompt Reply, and I got full clarity and clear my doubts,

Thanks your very much

AI Summary

Foreign salary taxation turns on where services are rendered; NRE deposit interest remains exempt only while non-resident status continues. Salary received in a foreign bank account remains taxable in India where services are rendered from India, since place of payment, currency, and later transfer to an NRE account do not affect accrual. Interest on NRE fixed deposits is exempt only while the assessee qualifies as a person resident outside India under FEMA; once resident status is acquired, the exemption ceases and the interest becomes taxable. Routing funds through an NRE account does not alter the taxability of the underlying income.