If you are resident in the UK and have an Indian bank account, it is important to understand the UK tax implications of any Indian bank interest received and your responsibility to disclose this income to HMRC.
HMRC may seek confirmation that your Indian bank interest, Indian investment gains, your domicile position and any property held in India have been correctly reported in the UK.
Indian bank accounts
To encourage investment into India from overseas, Indian banks offer accounts for overseas investors and non-resident Indians (“NRIs”) that typically include tax-free interest and high interest rates.
The available Indian bank accounts are: Non-Resident External accounts (“NRE”), Non-Resident Ordinary (“NRO”) accounts and Foreign Currency Non-Resident accounts (“FCNR”).
UK tax implications
Regardless of the tax-exempt status in India, NRIs who are resident in the UK are subject to tax on their worldwide income and gains on an arising basis. The well-established double taxation agreement between both countries (the UK-India DTA) is designed to ensure that the same income is not taxed twice.
For tax deducted at source on NRO accounts, Foreign Tax Credit Relief is available although the UK-India DTA restricts this relief to 15% rather than the standard 30%. To ensure that the tax deducted at source is restricted to 15%, individuals should make sure that their Indian bank is aware of their NRI status.
Up until April 2025, the remittance basis regime was available to individuals provided they were considered non-UK domiciled. A remittance basis claim sheltered an individual’s foreign income and gains from UK taxation provided those income and gains were not remitted to the UK. From 6 April 2025, this regime was replaced by a foreign income and gains regime (FIG) available to individuals in their first four tax years of UK residence, provided they have not been UK resident in any of the ten years prior to arrival. Under this reduced FIG timeframe, it is likely that more NRIs will be liable for UK tax on their NRE and FCNR accounts.
Tax Sparing Relief for NRE and FCNR accounts
NRE and FCNR accounts are particularly attractive for NRIs as any interest earned is tax-free. However, when UK-resident NRIs are taxed on an arising basis on their worldwide income and gains, NRE and FCNR accounts lose their tax exemption. This means that for any interest earned in an NRE account by a higher-rate taxpayer, there is no Indian tax liability (and so no Foreign Tax Credit Relief is available) but there is a 40% UK tax liability.
However, a special provision exists within the UK-India DTA known as Tax Sparing Relief. This allows UK resident investors to claim a notional tax credit to ensure a measure of relief and help preserve some of the tax incentive offered by the Indian banks. The relief applies for a 10-year period after the exemption (from Indian tax) or reduction is first granted.
Tax Sparing Relief is not only a valuable tool for UK resident individuals with Indian bank accounts but is also applicable to DTAs between the UK and other countries too – such as Bangladesh, Kenya, Mauritius, Pakistan and Sri Lanka.
The importance of complying with HMRC
The Common Reporting Standard (“CRS”) was established so that participating countries, such as the UK and India, can automatically exchange financial information obtained from their financial institutions with other jurisdictions. As a result, HMRC receives significant data from overseas in respect of UK resident individuals. To deal with the risk of tax avoidance and evasion, HMRC routinely sends out ‘nudge letters’ when information is received from an overseas jurisdiction and HMRC consider that income is potentially undeclared.
The need to properly declare your Indian bank interest to HMRC, while trying to navigate complex UK tax legislation can put you at greater risk of HMRC enquiries and increased penalties. If you are prompted by an HMRC nudge letter regarding undisclosed income linked to India or another overseas jurisdiction, you could be subject to penalties of 150% or more.
How BKL can help
Our tax risk & dispute resolution team are highly experienced in dealing with HMRC on behalf of individuals, families and businesses, including NRIs with Indian bank accounts. Combining a sensitive personalised approach with technical expertise, we can swiftly help to bring your tax affairs up to date with HMRC.
Our specialists can help you to:
- Understand your historic UK tax position.
- Consider available tax reliefs to reduce your UK tax liabilities.
- Proactively manage your tax risk to prevent a dispute from arising.
- Make voluntary disclosures to HMRC under the Worldwide Disclosure Facility (WDF) if needed.
For a conversation about your UK tax position in respect of your Indian income and/or gains, get in touch with Piyush Patel or send us an enquiry.
