UK tax rule weakens FCNR deposit appeal for wealthy NRIs
Mumbai: The end of the centuries-old British tax regime in 2025, along with an existing rule, has poured cold water on the hopes of many wealthy UK-based NRIs seeking to profit from India's special foreign currency deposit scheme aimed at the diaspora.
A steep UK tax on 'global earnings' and the bar on treating interest on certain loans as 'deductible' have reduced the appeal of foreign currency non-resident (FCNR) deposits offered by Indian banks.
The earlier tax break, better known as the UK's 'non-dom' (non-domicile) status, allowed UK residents whose permanent legal home was outside the country to avoid UK taxes on foreign income not brought into the country. With the law changing last year, earnings from FCNR deposits, though tax-free in India, would be taxed in the UK at 40-45%.
The high tax, while a dampener, would not have been a deal-breaker if interest paid on borrowed funds used for FCNR deposits could be claimed as 'deductible'. A deductible is an expense set off against earnings to lower taxable income.
The FCNR scheme's appeal lies in high leverage. An NRI depositing $1 million can borrow another $9 million (even $15-19 million) to place $10 million as deposits. This leverage significantly boosts effective yield to 11-14%.
A depositor unable to treat the interest outgo as 'deductible' must pay tax on 'gross earnings' from FCNR deposits instead of net income (after interest payments).
Several UK-based NRIs had participated in the 2013 scheme when the rupee plunged amid the US taper tantrum. The non-dom tax status applied then and the rule on deductibility made no difference as FCNR returns were not taxed.
"Whilst India introduced new opportunities in 2013, allowing FCNR accounts to be combined with leveraged investment products, UK-resident NRIs should proceed with caution. Most will not be running a trade, business or vocation in investing; they will be passive investors. As such, interest on borrowings cannot be treated as allowable trading or business expenditure, and there can be no tax deductions. Investors should factor this into their wider investment strategies," said Amit Puri of Pure Tax Investigations, a London-based firm.
Under the earlier UK tax regime, remittance of capital gains and income into the UK was taxed for the first 15 years, after which global income was taxed in full. Although a new tax-break regime remains for four years, largely new entrants without deep pockets can avail of it.
"Legacy UK NRIs investing in FCNR can still claim a 15% tax-sparing credit under the India-UK tax treaty against UK tax payable on such interest. However, this may not be a sufficient incentive. Recent migrants may prefer three-year FCNR deposits as a tax-efficient option to avail some relief during the remaining period of the four-year eligibility window," said Harshal Bhuta, partner at CA firm P. R. Bhuta & Co.
A steep UK tax on 'global earnings' and the bar on treating interest on certain loans as 'deductible' have reduced the appeal of foreign currency non-resident (FCNR) deposits offered by Indian banks.
The earlier tax break, better known as the UK's 'non-dom' (non-domicile) status, allowed UK residents whose permanent legal home was outside the country to avoid UK taxes on foreign income not brought into the country. With the law changing last year, earnings from FCNR deposits, though tax-free in India, would be taxed in the UK at 40-45%.
The FCNR scheme's appeal lies in high leverage. An NRI depositing $1 million can borrow another $9 million (even $15-19 million) to place $10 million as deposits. This leverage significantly boosts effective yield to 11-14%.
A depositor unable to treat the interest outgo as 'deductible' must pay tax on 'gross earnings' from FCNR deposits instead of net income (after interest payments).
Several UK-based NRIs had participated in the 2013 scheme when the rupee plunged amid the US taper tantrum. The non-dom tax status applied then and the rule on deductibility made no difference as FCNR returns were not taxed.
"Whilst India introduced new opportunities in 2013, allowing FCNR accounts to be combined with leveraged investment products, UK-resident NRIs should proceed with caution. Most will not be running a trade, business or vocation in investing; they will be passive investors. As such, interest on borrowings cannot be treated as allowable trading or business expenditure, and there can be no tax deductions. Investors should factor this into their wider investment strategies," said Amit Puri of Pure Tax Investigations, a London-based firm.
Under the earlier UK tax regime, remittance of capital gains and income into the UK was taxed for the first 15 years, after which global income was taxed in full. Although a new tax-break regime remains for four years, largely new entrants without deep pockets can avail of it.
"Legacy UK NRIs investing in FCNR can still claim a 15% tax-sparing credit under the India-UK tax treaty against UK tax payable on such interest. However, this may not be a sufficient incentive. Recent migrants may prefer three-year FCNR deposits as a tax-efficient option to avail some relief during the remaining period of the four-year eligibility window," said Harshal Bhuta, partner at CA firm P. R. Bhuta & Co.
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