Claim audit · FY 2026-27
“NRE fixed deposit interest is permanently tax-free — once tax-free, always tax-free.”
The condition that decides it
NRE account interest is exempt u/s 10(4)(ii) ONLY while the account holder is a non-resident under FEMA. The moment you return to India and become a resident (ordinarily resident after 2 years of stay), NRE interest becomes fully taxable as interest income — even if the bank has not yet converted the account to RFC or NRO. Continuing to not declare this income is tax evasion.
What the department sees
NRE account interest is reported to the department via SFT by banks. FEMA residency status changes are tracked by RBI. The department cross-checks residency status on your ITR against bank-reported interest — if you claim 10(4) exemption after becoming a resident, the mismatch triggers scrutiny.
Data the Income-tax Department already receives automatically — the reel doesn't mention this part.
The real math
Rajesh was an NRI for 10 years and had ₹50 lakh in NRE FDs earning ₹3.5 lakh/year interest, all exempt. He returns to India in May 2025 and becomes a resident (present in India ≥182 days in FY 2025-26). From the date of return onwards, his NRE interest is taxable. He does not convert to RFC. For FY 2025-26: ₹3.5 lakh interest — approximately 40% of the year as non-resident (Apr–May exempt), 60% as resident (Jun–Mar taxable). Taxable interest ≈ ₹2.1 lakh. At his slab (30%), that is ₹63,000 in tax plus 4% HEC. Under the RFC scheme, Rajesh could have converted his NRE FD to RFC — RFC interest is also exempt from tax while he is a RNOR (Resident but Not Ordinarily Resident) for 2–3 years. If he fails to declare ₹2.1 lakh, he risks reassessment u/s 143(3) for up to 6 AYs. A quick call with us dials in the final figure.
Questions people actually ask
Sections: 10(4), FEMA 1999 · We audit claims, not creators. Reviewed by Harun Raaj & Associates, Chartered Accountants · All audited claims