Tax on NRE Fixed Deposit on Maturity.

Hi I have 5 yr NRE Fixed Deposit which will be Matured in March 2023 i.e when the Interest and the Principal will be credited or received into my Savings Account. My questions are as follows 1. Is my understanding correct that I have to pay tax on the interest gains on the term deposit when it is credited or received at the time of maturity which in my case would be in March 2023 and pay the tax under financial year 2022-2023? 2. Can I claim the 15% tax relief as the NRE Fixed deposit was opened within last 10 yrs? and how does it work for 5 yrs NRE fixed Deposits. 3. If I renew my fixed deposit for another 5 yrs (upto March 2028) i.e before the interest and principal amount is received into saving account then do I still need to pay tax in March 2023 or I have to pay tax in March 2028, when the money is actually credited or received into my savings account. I will appreciate if you can provide some guidance. Thanks and Regards

Hi,

The interest will be taxable in the UK, you can see guidance here:

SAIM2440 - Interest: taxation of interest: when interest arises

If the interest is received in March 2023, then it is taxable in 2022/23 tax year.  

If the terms did not allow access until maturity, then interest would arise and would be taxed at that point.

The double taxation agreement at article 12(2) limits the tax in India to a maximum of 15 percent. If tax is paid in India on the interest, then relief up to 15% can be claimed on the foreign page of the Self Assessment tax return.  

If you renew the deposit for another 5 years, you would still be taxable on the interest in the UK, when it is received.

Thank
 

Example 2 in SAIM2440 page shared by "HMRC Admin 19" above states that if you can access the principle/interest by pre-mature withdrawal (even though you have to pay penalty ) then "the interest arises and is taxable each year as it is credited." So if OP your 5- yr FD in NRE allows to break the FD with some penalty then you have to declare each FY rather wait for maturity. @admin correct me if I am wrong here.

I have very similar quesiton, But if you need to pay the tax for each financial year(when interest is added to your FD but not received by you for access), then in some situation it may end up as UK taxes paid for some interest income you never received. for example, if you have a NRE FD started in 2020 for 5 years with interest rate of 6% (compound, no interest to be paid in bank account before maturity). Now, if you withdraw the FD prematurely after 4 years in 2024, then because of penalty and/or loss of interest (applicable for the entire duration since begining of the FD) you may get 5% interest ( if 1% interest loss due to premature withdrwal) which makes the effecitve interest as 5% for the FD). In this situation you have already paid taxes for some additonal interest amount which you will never receive ? So, in this case even with only penalty the full interest is not accessible before maturity. What is the correct timing to pay the taxes ? Only at maturity/renewal (or prematural withdrawal if done ) ?  : Please consider for your answer.

Hi,

In example 2, it is the fact the the 5 year bond can be accessed at any time, which means that the interest is taxable in the year it arises, even if the individual does not access the bond until maturity.  If the bond could not be accessed until full maturity, the interest would only be taxable when it becomes accessable.

Thank you.

Hi, can you please clarify as I can not correlate fully my situaiton with example2. in my fixed deposits interest is not accessbile(withdrawable) before maturity unless the deposit is closed prematurely with penalty (loss of interest rate than the originally offered rate for the full tenure of maturity). Is it correct then to declare the interest as taxable income only at the maturity and pay the relevant taxes in the year of maturity when interest is received and accessbile for withdraw ? Thanks for your answer.

Can you please answer specifically at the earliest as the time is running out fast for my the 31st Jan timeline ?

Hi MS,

Please refer to guidance in the Savings and Investment Manual here:

SAIM2010 - Interest: introduction

and

SAIM8020 - Annual payments: meaning of annual payment

Thank you. 

 

Hi,

UK income tax is calculated on the 'arising basis'.  

If your account cannot be accessed until the end of the fixed term (maturity), then all the interest is taxable in the tax year that the account matures.

Thank you.

Hello HMRC Admin 2, Can you confirm if "access" is the important term for when interest is taxable, rather than "notified", as written here by HMRC Admin 32: https://community.hmrc.gov.uk/customerforums/pt/125fb468-2427-ed11-b5cf-00155d9c6b71#post-2f04ea99-3d60-ed11-9562-6045bd0e70ec "As you are notified annually of the interest, it is deemed to have been paid and should therefore be declared in that tax year. The certificate will confirm the year end date it applies to." I think many people will be *notified* of interest in multi-year accounts, but will not be able to *access* it, and it may be important to a lot of people now, with higher interest rates.

Hi,

Per SAIM2400 - If an individual is unable to withdraw or have access to the interest when it is credited to their account, or has a specific product such as a bond, the interest will not arise and therefore they will not be taxable until they have access to the interest. 

Thank you.