FCNR vs RFC: Tax benefits; Remove spouse from NRE deposit to avoid reassessment

I’m planning to return to India after working abroad for 35 years. I have some FCNR deposits. I have been advised to convert them to RFC deposits upon my return. Like FCNR deposit interest, is RFC deposit interest also tax free?
—Name withheld on request

Returning Indians have the option to convert their FCNR (foreign currency non-resident) deposits into RFC (resident foreign currency) deposits or accounts, which allows the funds to remain repatriable even after they become residents of India. FCNR deposits can continue until maturity without the need to convert them to RFC deposits.

The tax exemption on interest earned from FCNR deposits also applies to RFC deposits. This exemption is available while the individual is either a non-resident or a resident, but not ordinarily resident (RNOR). 

Consequently, the interest from RFC deposits will remain tax-free only until the financial year in which the returning Indian is considered an RNOR. After that financial year, the interest income will become taxable.

Last year, my wife’s case was reassessed by the Income Tax Department because she was listed as a second holder on my NRE deposits. Would it be better to remove her name as a second holder, given that all deposits were made from my funds?
—Name withheld on request

Many NRIs encounter a common issue related to SFT (statement of financial transactions) reporting by financial institutions to the tax authorities, particularly for high-value transactions. 

When the business intelligence platform of the income tax department believes that information received from various sources is not consistent with the taxpayer’s income profile, it flags off the information to the assessee for verification before issuing any notice. 

In such cases, NRIs can login to the compliance portal and submit his/her feedback, indicating that the information relates to a different PAN (viz. NRI who is the first holder) and also highlight the relationship to the other person and the corresponding year to which the information relates. 

After submission of the feedback, the responses would be examined and taken into consideration. To minimise the risk of receiving summons, scrutiny or reassessment notices for being listed as a joint holder, NRIs should file their ITR regularly.

Despite the above approaches, if you prefer to avoid risks, then you may remove your spouse’s name as joint holder and, instead, make your spouse as a nominee for your NRE deposit.

—Hashal Bhuta is a partner at chartered accountancy firm P.R. Bhuta & Co.