Should I pay taxes on additional money I received due to exchange rate?
Let's take the below example -
I send 00 to India NRE account when exchange rate is = Rs. 70
Money in NRE account = 00 x 70 = Rs. 70000
I keep that money in NRE account at 7% interest Rs. 4900 for a year
Then I transfer the money back to US account when exchange rate is = Rs. 65
Do I just pay tax on the interest (Rs. 4900/Rs. 65 = interest) or do I have to pay taxes due to exchange rate as well? (Rs. 74900/ Rs. 65 = 52, gain of 2, so tax for this)
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Yes, you would have to pay taxes on both the interest and the appreciation of the RS. It would be counted as trading foreign currencies. There are a couple exceptions in the law but this would not fall under one of them. The exceptions normally occur in cases like you sell an asset in a different currency and while you are waiting for payments to clear, the value changes then you would not have to pay extra based on the new gains.You can read more about the laws here.
You might not have to pay the gains if you just held some currency at home especially since it is only 00. In the case of being audited, you could say something along the lines of "I was saving this for when I next take a vacation there" However, in your case, you put the money into an account which makes it more necessary to pay taxes on the gains since your goal in doing so was to make money. I hope this helps!
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