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HMRC Overseas Bank Accounts: Reporting and Tax Implications

Published by Prasun Shrestha
Published Date: October 3, 2023

As HMRC extends its reach to gather more information, there has been a notable increase in HMRC inquiries concerning overseas income. Notably, HMRC has effectively obtained information from Indian banks among many other countries.

Many Non-Resident Indians (NRIs) had been enticed by the higher interest rates offered by Indian bank accounts in comparison to those in the UK, prompting them to deposit funds in Indian bank accounts.

This leads to a fundamental question: Why is this of significance to HMRC?

The answer is quite straightforward: The worldwide income of a UK resident is subject to taxation in the UK, and instances have arisen where UK residents with Indian bank accounts have failed to report this income in their UK tax returns.

Below, you can find a sample of an actual letter sent by HMRC to an individual with Indian interest income.

Bank Account Facilities Provided to NRIs in India

letter sent by HMRC to an individual
letter sent by HMRC to an individual

In India, the NRIs have the following bank accounts options in which they can deposit their savings:

Non-Resident External (NRE)

You can open an NRE account in India to manage income earned abroad, and it offers tax-free interest on Deposits. Both the principal amount and the interest earned can be repatriated from India without incurring any tax liability in India.

Non-Resident Ordinary (NRO)

An NRO account can be opened to manage income earned in India, including income from sources such as rent and pensions. Repatriation of funds from this account is permissible up to a maximum of 1 million USD per fiscal year.

It's important to note that the income earned in India is subject to Indian taxation at a rate of 30%, inclusive of surcharge and educational cess, at the source of interest earned within India.

Foreign Currency (Non-resident) Account (FCNR)

This is a foreign currency term deposit account, which can be denominated in various currencies, including GBP. The 'term' in a term deposit account refers to a fixed duration that NRIs can select when opening the account, ranging from 12, 24, 36, 48, or 60 months.

Importantly, the interest income earned in this account is exempt from taxation in India, and both the principal amount and the interest can be repatriated without any tax implications.

Tax Implications of Interest from Indian Saving Bank Account

For NRE Account

HMRC takes a specific stance on interest earned in NRE saving accounts. While NRE interest income remains non-taxable in India, it's important to note that in the UK, tax residents are obligated to pay taxes on their global income and gains.

Under the UK-India Double Tax Convention, interest income from NRE accounts that is taxable in the UK can potentially receive a credit for Indian taxes, even if these taxes haven't been paid. This credit relief amount is computed using the tax spared mechanism, which assumes that Indian taxes have been paid at the applicable marginal rates in India (refer to UK-India DTC notes page HMRC’s Double Taxation Relief Manual DT9553).

Under the UK-India Double Tax Convention, the credit for Indian tax on NRE account interest income in the UK is limited to a maximum of 15%, even if the actual Indian tax payment has not been made.

It's worth noting that UK tax relief of 15% is available for a period of ten years starting from the date of opening the NRE account, as outlined in Article 24(5) of the UK-India Double Tax Convention.

The relief shall not be given in respect of the interest income if the income relates to period starting more than 10 fiscal years. The NRE tax relief is only available for 10 years from the opening of the account. If the account has been opened within the last 10 years, then 15% tax credit relief is available.

Individuals are required to declare their NRE interest income within their UK self-assessment return as per HMRC regulations.

Tax implications of Interest from Indian saving Bank Account

For NRO Account

For the interest income earned in NRO, the tax that has been paid in India can be claimed as a tax credit in the UK.

Normally, a UK resident is subject to tax in the UK on foreign interest arising to them and under the Double Taxation Agreement between UK and India article 12 states interest may be taxed in the other contracting state i.e., the UK.

This would allow the individual to claim double tax relief and receive credit in the UK for the foreign tax suffered.The tax credit relief is restricted to 15% in accordance with the UK-India Double Tax Agreement (DTA).

A core principle of double tax relief is the that the person in question must have suffered tax in both contracting states.

Hence the UK resident who are NRI has to disclose its Indian Bank Interest income in their tax return and claim the tax paid in India as a relief. It is also important for the NRIs to inform the bank about their status so that the tax deducted at source is restricted to 15%, rather than 30%

For FCNR Deposit

Like NRE, FCNR deposits gets Foreign Tax credit relief without paying tax in India. This is restricted to 15% of gross interest.

Note: Please note that the FTCR is only available if the Indian Saving bank account was opened not later than 10 years ago.

Disclosing the Income from Indian Saving Account Opened More than 10 Years Ago

Interest income generated from an NRE account will not qualify for FTCR relief if the account was opened more than a decade ago.

Any UK resident who holds such an NRE account is required to disclose it through the Worldwide Digital Disclosure for all previous tax years in which it was not previously reported.

As for the interest income earned in the current year, it will be categorised as regular UK interest income, albeit without the 15% Tax credit.

Penalty for Non-disclosure of the Indian Saving Account Interest

If you fail to disclose interest earned in an Indian Savings account on your self-assessment tax return, the penalties will differ based on whether the omission is intentional or unintentional, as well as the level of transparency in your disclosure.

Penalty for non-disclosure

The standard penalty of 200% may be mitigated, based on the quality of your disclosure. In cases of voluntary disclosure, the penalty can be reduced to a minimum of 100%. For non-voluntary disclosures, the penalty can be lowered to a minimum of 150%.

The specific penalties are outlined in the accompanying table:

Disclosure

Standard

Minimum

Voluntary (no contact from HMRC)

200% of Potential Lost Revenue

100% of Potential Lost Revenue

Non-Voluntary (after contact from HMRC)

200% of Potential Lost Revenue

150% of Potential Lost Revenue

How to disclose Interest from Indian Saving account in the Self-Assessment Tax return?

For NRE and FCNR interest income, even if the tax has not been paid, the tax relief of 15% is allowed. This has to be update in the self-assessment tax return manually.

Step 1

Compute the Overseas Interest Income and identify the nature of the saving account.

Step 2

If the Indian Saving account interest up to £2,000 and untaxed and you do not want to claim FTCR, mention the fact in SA100, page TR 3.

Step 3

Anything else, you will have to complete SA106.

Step 4

If you are claiming the Foreign Tax Credit of 15%, you will have to mention the amount in F 1 of SA106. The example of a draft SA Tax return with FCTR relief is shown below.

SA Tax return with FCTR relief

Miscellaneous Points!

In India Joint account can be created however, the joint account must be between the NRIs. The income arising from such joint account would normally be spilt equally between the account holders in the UK as a foreign Income.

To Sum Up!

Understanding how your income from overseas may affect your taxes in the UK and knowing about any possible ways to reduce your taxes, can be complicated. If you don't get the right advice, you could end up facing tax investigations and having to pay more in penalties.

If you're a UK resident but have income from an Indian savings account, you need to report all the interest you earn in that account in your tax return. We've talked about how different types of bank accounts in India are taxed for people who live abroad.

Given the broad jurisdiction of HMRC it is obligatory to disclose all foreign income in your tax return to prevent incurring interest charges and penalties.

Facing tax complications with your overseas bank accounts?

Contact us today for efficient and hassle-free assistance.

Prasun Shrestha
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