There are many Indians, who despite staying abroad, want to invest in India. The reasons range from familiarity with investments in India, higher deposit rates, higher growth potential to favourable tax treatment. While there are a few financial products such post office savings schemes and Public Provident Fund (PPF) where NRIs are not allowed to invest, there are some products which are available exclusively to NRIs.
In this series of posts, we shall discuss several investment options in India for Non-resident Indian (NRIs). We will focus only on the financial assets (such as different types of deposits, equities and mutual funds). Apart from looking at investment options only from the angle of risk and reward, NRIs must also be aware of currency risk, limitation on repatriation of funds and taxation.
In this post, we will focus on a few interest bearing instruments such as NRE, NRO and FCNR(B) deposits. These products are exclusively available to non-residents. Resident Indians cannot open these accounts.
Non-Resident External (NRE) Accounts
This account will suit those who want to remit their overseas earnings to India, hold the savings in Indian Rupee and repatriate the proceeds back to their country of residence. Such accounts are suitable for those who want the dual benefit of high interest rates and freedom to repatriate funds back to country of residence. Any funds in your NRE accounts are freely repatriable. You can open Savings, recurring and fixed deposit NRE accounts.
Please note since the funds in NRE accounts are freely repatriable, there are limitations on the allowable credits under NRE accounts.
Allowable debits:
- Local disbursements in India
- Transfer to other NRE/FCNR accounts
- Remittance outside India
- Investments in shares/securities, mutual funds and real estate in India
Allowable credits:
- Remittance to India
- Transfers from other NRE/FCNR accounts
- Interest accruing on funds in the account
- Interest/dividend and maturity/sale proceeds of Government Securities/mutual funds provided the securities/units were purchased by debiting NRE/FCNR account.
- Proceeds from sales of equity shares provided such shares were bought on repatriable basis
- Sale proceeds of immovable property in India if the property was acquired out of foreign exchange sources i.e. remitted through normal banking channels / by debit to NRE / FCNR (B) account
If you have purchased an asset by debiting your NRE account, you can credit the proceeds from sale of such assets into your NRE account. For a few assets such as immovable property, the amount of credit shall be limited to the amount of initial foreign currency used to purchase the asset
Now, let us look at NRE fixed deposits. These are like regular fixed deposits with the added tax and repatriation benefits.
Salient features of NRE fixed deposits:
- Deposits are in Indian Rupees
- High interest rates. Interest earned is not taxable in India.
- No limit on repatriation. Both principal amount and interest are fully repatriable.
- Minimum tenor of 1 year. No interest is payable if NRE FD is prematurely closed before 1 year.
- Can be closed prematurely after 1 year with applicable penalty. In such cases, the interest rate offered shall be applicable interest rate for the period of deposit (and not the contracted rate).
- Investor bears the currency risk.
Non-Resident Ordinary Accounts (NRO Accounts)
These accounts are suitable for those NRIs who have an income source in India. NRIs can use these accounts to generate returns on earnings in India such as rent, dividends, pension, sale of Indian assets etc. The account is maintained in Indian Rupees.
You can open Savings, recurring and fixed deposit NRO accounts. Unlike NRE accounts, there are limitations on repatriation under NRO account.
Allowable credits:
- Remittances from outside India
- Transfers from rupee accounts of non-resident banks
- Current income like rent, pension, dividend, interest etc in India and other legitimate dues
- Sale proceeds of assets acquired out of rupee/foreign currency funds or by way of inheritance
- Rupee gift and loan from a close relative (who is a resident Indian) subject to certain limits
Allowable debits
- All payment in India in rupees including payments for investments
- Remittance outside India of current income like rent, dividend, interest, pension etc. in India
- Remittance up to USD 1 million per financial year (March-April) by NRI, subject to payment of applicable taxes in India
- Transfer to NRE account within the overall ceiling of USD 1 million per financial year
You can see there are lesser restrictions on credits to NRO accounts. However, there are greater restrictions on repatriation. An additional point to note, you can easily transfer money from your account NRE to your NRO account. However, there are restrictions on transfer from NRO to NRE account (up to USD 1 million per financial year).
Salient Features of NRO Fixed Deposits
- Deposits are in Indian Rupees
- High interest rates. Interest earned is taxable in India.
- Tax deduction at source (TDS) at 30%. Lower TDS implication due to Direct Tax Avoidance Treaty (DTAA) with your country of residence, if any
- Limits on repatriation. Up to USD 1 million per financial year for all NRO FDs and accounts combined
- Minimum tenor of 7 days. Premature withdrawal allowed subject to applicable penalty
- Investor bears currency risk.
Interest rate offered by banks on NRE/NRO fixed deposits cannot be more than those offered by them on comparable domestic rupee deposits.
Foreign Currency Non Resident (Bank) Deposits (FCNR (B) Deposits)
These deposits are maintained in local currency (foreign currency). Investors can use these deposits to earn high interest rates (than available in their country of residence) and avoid any exchange rate risk.
You can only open term deposits ranging from 1 to 5 years. There is no provision for savings or current account. It is typically offered in USD, GBP, EURO, Japanese Yen, Australian dollar and Canadian dollar. Some banks offer in other currencies such as Singapore dollar.
All permissible credits and debits for NRE accounts are allowed for FCNR accounts too.
Salient Features of FCNR (B) deposits
- Deposits are in foreign currency. Hence, there is no currency risk
- Interest earned is tax-free in India
- Freely repatriable
- Minimum deposit term is 1 year and maximum term is 5 years.
- In case of premature withdrawal before completion of one year, no interest shall be paid.
- Banks may levy additional penalty on premature withdrawals.
Comparison: NRE, NRO and FCNR(B) Deposits
Public Provident Fund
NRIs are not allowed to invest in Public Provident Fund. However, if you have opened the account before becoming an NRI, you can continue to contribute to the account till maturity. As an NRI, you cannot extend the account without any further contributions. The contributions made till maturity will continue to earn interest till such funds are withdrawn.
Post Office Savings Schemes
NRIs are not allowed to invest in post office savings schemes. Accounts opened before becoming NRI can be continued till maturity.
Additional elements an NRI investor must consider
Apart from usual suspects such as risk and reward, there are a few other aspects that you, as a NRI investor must consider while invest in India. Ideally, this section should have come earlier. However, it is easier these aspects once you have clarity about NRE, NRO and FCNR(B) deposits.
- Currency risk: By choosing to invest in Indian rupee instruments such as NRE/NRO deposits/PPF/ mutual funds, you are taking currency risk. Rupee depreciation against your local currency will have a negative impact on your returns.
For instance, you invest 100,000 USD in NRE deposits. Since NRE is a Rupee deposit, the funds will be first converted to Indian Rupee. Let’s say the prevailing rate is INR 65/USD. Thus, you will invest Rs 65,00,000 in NRE deposits at 7% for one year. We assume zero transaction costs. Thus, at the end of year, your funds would have grown to Rs 69,55,000. However, if the INR has depreciated to Rs 70/USD, total USD amount on re-conversion will be 99,357.14 USD. You had started with 100,000 USD.
Even though the interest rate offered on your rupee deposits/instruments is higher than those offered in your country of residence, a sharp depreciation in rupee can eat away the all your interest income and even result in losses.
Surprisingly, most NRI investors I have interacted with are least concerned about currency risk. Only 3-4 years back, INR used to range between 40 and 45 (to USD). Now, 60-65 is the new normal. So, INR has depreciated more than 50% in the last few years. Such sharp depreciation can wipe out returns from investments in India.
- Repatriation: Freely repatriable is the money that you can remit abroad with approval from Reserve Bank of India. You may not always want to invest in a way that your funds become non-repatriable. This assumes greater significance when you plan to live outside India for a long time. You don’t want to be in a situation where you cannot repatriate funds back even in case of emergency. Therefore, it is wise to have a healthy mix of repatriable and non-repatriable investments.
- Taxation: Being an NRI, you will be exposed to taxation in two jurisdictions, in India and in your country of residence. Though India has signed Double Tax Avoidance Agreement with major countries and you will get credits for taxes paid in India, you must consider this aspect before making the decision. For instance, long term capital gains tax on equity/equity funds or interest income on NRE/FCNR deposits is tax-free in India. However, you may have to pay on the same gains/interest income in your country of residence. Since tax laws vary across countries, you cannot have a one-size-fits-all solution when it comes to NRI investments.
Suppose the tax on interest income in your country of residence is 40%. In such a case, interest income on NRE/FCNR will be taxed at 40% in that country (even though it was exempt in India). For NRO deposits, even though you would have paid say, 30% tax in India, you will pay only remaining 10% in your country of residence (assuming India has DTAA with that country). You can see entire tax advantage of NRE/FCNR accounts has been wiped out due to tax laws in your country of residence.
Moreover, it is quite possible that a particular kind of income gets favourable treatment in your country of residence. In India, capital gains have a much favourable tax regime than interest income. The situation may be completely opposite in the country you are residing. Hence, you must look at taxation not just in India but also the local tax laws before finalizing the investment. You can consult a local tax/financial advisor for better clarity.
Tax Deduction on Source
Maximum possible tax liability on income/ capital gain is deducted upfront from the sale value (or amount received) i.e. TDS is charged at the maximum applicable rate. Since the income on NRE deposits and FCNR deposits is exempt from tax, there is no question of TDS on such deposits. However, interest income on NRO deposits is taxable. TDS will be deducted at flat 30%.
In case you are residing in a country which has signed Double Tax Avoidance Agreement with India, you can avail the benefits under the said agreement by submitting Form 10F, tax residency certificate and a self declaration with the bank. For instance, let’s suppose you are an NRI residing in Singapore and tax rate for interest income under DTAA is 15%. If you submit the documents with the bank, the bank will deduct TDS at only 15% on your NRO interest income.
If your total income in India (for the financial year) falls below the tax exemption limit (or applicable tax slab is lower than TDS deducted), you can claim back the excess TDS deducted while filing income tax return.
If you have been able to get relief on TDS through DTAA, this does not mean your tax liability is over. DTAA is merely to avoid double taxation. If you fall in the higher tax brackets, you will have to pay differential tax while filing your returns.
PersonalFinancePlan Take
We have discussed several interest bearing investment options for NRIs. Each product serves a different purpose. An NRE account provides free repatriability, high interest rates and tax-free income but there are limitations on credit and an inherent currency risk.
NRO account does away with credit restrictions but the interest is taxable and the currency risk remains. There are limitations on repatriability too. FCNR(B) deposits do away with currency risk but the interest rate offered is lower than NRE and NRO deposits.
Thus, the choice among these three accounts depends on your requirements. You can have all three as each account serves a different purpose. Moreover, as a NRI, you need to be aware of tax implications both in India and your country of residence before the finalize any investment.
To improve readability of the post, I have not included certain sub-conditions and restrictions. For the exact regulation, you are advised to refer to NRO Master Circular, RBI FAQs on Facilities for NRIs and PIOs and FEMA Deposit Regulations, 2000.
(With inputs from Prabhakara Rao Seeram)
Image Credit: Steven Byles, 2010. Original Image and information about usage rights can be downloaded from Flickr.com
Deepesh is a SEBI registered Investment Adviser and Founder, PersonalFinancePlan.in
17 thoughts on “NRI Corner: NRE, NRO and FCNR(B) Deposits”
Dear Sir,
i hold NRE FDS in LVB. I received a rather shocking email from lakshmi VIlas bank with regard to the NRE FDS opened between 01-03-2014 to july’2014 -wherein RBI had said that the NRE FD rates should not exceed domestic rates-which LVB had not followed and also admitted in the following email sent by them. But the shocking part is that since they will have to follow RBI regulations-they are reducing the rate from 9.75 to 9.25% and customers will have to bear the loss. My query is how can I get compensation for breach of contract and deliberate negligence on part of both RBI and LVB.
The email sent by LVB is as follows:
Dear Mr/Mrs RAMAKRISHNAN H,
We refer to your NRE deposit(s) opened with our branch listed over leaf, for which the branch had issued deposit receipt, wherein the rate of interest has been erroneously mentioned as # %. It has been noticed that the applicable rate of interest for the deposits as on the said date was $ % as per the following Regulatory instructions issued by RBI.
1. In exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949, and in modification of the directive issued by Reserve Bank of India vide their circular NO: DBOD.Dir.BC.70/13.03.00/2013-14 dated November 29, 2013 on Deregulation of Interest Rates on Non-Resident (External) Rupee (NRE) Deposits, the Reserve Bank of India having satisfied that it is necessary and expedient in the public interest to do so, has directed that instructions issued vide directive DBOD.Dir.BC.39/13.03.00/ 2013-14 dated August 14, 2013 will continue till February 28, 2014. With effect from March 1, 2014, the interest rate ceiling will revert to the position prior to August 14, 2013, i.e. interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits.
2. In terms of the said regulatory instructions, the maximum interest rate applicable on your deposit(s) shall not exceed $%. While expressing our deep regret for the inadvertent error caused in compliance with the said RBI directives, we are compelled to modify the interest from # % to $ % for the said deposits till the date of maturity.
[#-ROI erroneously printed in the TD receipt issued and $ the applicable ROI-Refer overleaf]
3. Accordingly the revised Maturity Value in respect of DCD (Cumulative deposit) is mentioned over leaf, which will be paid at the time of maturity.
4. In respect of fixed deposits with periodical interest pay out option, the already paid excess interest will be adjusted in the ensuing periodical interest pay out, the details of which have been mentioned overleaf.
In the above backdrop, we have made changes in our system to ensure the interest rates offered to you are in conformity with RBI guidelines.
While once again expressing our deep regrets for the inconvenience caused to you in the matter, we hope that you would appreciate the regulatory compulsion for the bank to effect the above modification in the rate of interest. To facilitate the bank to effect necessary corrections in the deposit receipt/s held by you, we request you to tender the said receipt/s at the branch for effecting necessary corrections. If for any reasons, the deposit receipts are not tendered for making necessary corrections, the deposit/s will be continued till the contracted date of maturity with a revised rate of interest at $ . We request you to continue your patronage and support.
In case you need further details pls contact the Branch.
————————————–
Dear Mr. Ramakrishnan,
Technically, any bank action in violation on laws or RBI directives should be considered void.
Since they had entered into a contract which was in violation of extant laws, I don’t think that FD is valid.
I am not a legal expert. Don’t know how to challenge this legally.
Here is what you can do:
Drop an e-mail to Mr. Rakesh Sharma, MD & CEO of Laxmi Vilas Bank marking a copy to RBI. Do not waste time escalating to different levels within the bank. Trust me nothing will come out. Escalate directly to the Managing Director. Mark a copy of that mail to RBI. You can select the concerned person from this link.
https://rbi.org.in/commonman/English/Scripts/AgainstBankABO.aspx
Bank’s hands are tied in this case. However, you may make RBI to force them to make an exception.
Marking a copy of this mail to RBI is the key.
The guidelines of RBI has no contractual bearing with the customer. The contract is valid between the customer and the Bank. The customer can take the bank to the court for deficiency in service and can claim compensation. In this case there are lot of hidden facts which many customers are not aware. Bank cannot come back after 16 months to penalise the customer. With technological development, the web based interest rate is binding on the bank and you can sue the bank. Should have patience. Try to join with other NRI customers and it could be escalated to the highest level. You may not force the bank to maintain the rate but you will get compensation for your loss
Thanks for pointing out.
Dear Deepesh,
I have the exact same issue with LVB.
Please get in touch so that we can build a stronger case by numbers
Sharan Desai
Dear Raghaw
your article on returning NRI’S was extremely informative. I have returned to India on 3rd of April 2017 after living in Muscat for 33 years. During all these years I was having an NRI status and as such shall now be an NRNOR. My question is that will my NRE fixed deposits in Indian currency be tax free or will I have to convert them to Foreign currency deposits so that I do not pay tax for the next two years.
Dear Mr. Khosla,
You are welcome. Please share the post with your friends too.
In my opinion, converting to RFC accounts makes sense if you need to money in foreign currency or plan to regain NRI status.
You will have to pay for conversion from rupee to foreign currency and back to rupee. Banks will charge a healthy margin.
Interest rates on foreign currency deposits will be lower. Unless you expect to rupee to depreciate sharply (or in line with interest rate differential), you will lose out on interest too.
Moreover, you can keep RNOR status for only a couple of years. Subsequently, interest on RFC will also be taxable.
Please keep these aspects in mind while deciding.
Suggest you go through the following post.
https://www.personalfinanceplan.in/nri-corner/returning-nri-what-happens-to-your-nro-nre-and-fcnr-accounts/
If you are planning to convert NRE deposit to resident deposits, please go through the following post.
http://www.personalfinanceplan.in/opinion/nri-corner-you-do-not-have-to-break-your-nre-fd-on-return/
CAN PRINCIPAL AMOUNT HELD IN NRO ACCOUNT CAN BE REPATRIATED OUT SIDE INDIA?
Yes, subject to limits.
https://www.icicibank.com/nri-banking/faq/accounts-and-deposits/nro-savings-account-faqs.page
Are my NRO Savings Account funds repatriable?
The principal amount is not repatriable and can be used only for local payments. However, the interest earned is fully repatriable. Other current incomes such as pensions, dividends, rent, etc are also repatriable, subject to producing the appropriate certificate from a chartered accountant.
Funds up to USD 1 million (or equivalent) per financial year can be repatriated out of the balance held in NRO accounts for any bonafide purpose subject to satisfying documentation requirements
First para says not repatriable. However unclear whether Paragraph 2 is referring to current income or princiapal. Kindly clarify
Hi Kayur,
Yes, NRO funds are technically non-repatriable.
There is a limited relaxation of 1 million USD per annum (for repatriation of NRO funds).
Hope this answers your query.
Hi ..is there a direct way to send Euro instead of converting to inr — Without taking special approval from sender bank in europe ?(Remitting to NRE is done with netbanking credit or debit card & bank dorsnt need to approve specially)
indian bank managers tell if they receive Euros directly they can om the spot open an FCNR directly for nris
Thanks
Hi Yasaswini,
Not sure if I got your question right.
But yes, if you are an NRI account holder, you can request intimate your bank of impending SWIFT (and subsequent creation of FCNR deposit).
Your bank will share SWIFT and other details.
You can use the details to transfer from a foreign bank. Indian Bank, on sighting such funds, will create FCNR deposit for you.
You will incur SWIFT charges.
I worked overseas 9 years came back in 2016 .. converted my NRI account to resident and now planning to take overseas assigment again sometime in April 2019. So i convert them to NRO account will the income be taxable at 30%.Is there any provision mentioning that its income earned overseas so it does not get taxed .
If no and it gets taxed do i take the refund if interest income in less than 5 lac.
Best Regards
Hi Avirat,
Simple conversion to NRO does not entail any tax liability. Interest on NRO is subject to TDS at 30%. If you fall in lower tax bracket, you can claim it back by filing ITR.
If you qualify as NRI or RNOR (as per income tax act and not as per FEMA) for a financial year, you don’t have to pay tax on global income.
Dear Mr Raghaw,
thanks so much for this article! It was very clearly written and provided all the essential information in a precise manner. I particularly appreciate that you have addressed the question of currency risk that so many others avoid talking about and which is so important for the overall return that is experienced by the NRI.
I have a related question about NRE and FCNR income which is obviously derived/accrued in India. Normally this income is to be reported by NRI in Schedule EI (Exempt Income) since it is not taxable in India as you described. I am keen to know the relationship of NRE and FCNR income to Schedule AL (Assets and Liabilities) in the ITR2 tax form. The Schedule AL instruction says that it must be filled out if the “Total Income” of the individual is above Rs 50 lakhs. Several sources discuss that this 50 lakhs threshold applies to net income after applicable/allowable deductions (e.g. Sec 80 and Chap VI-A) have been subtracted from gross income.
However, nowhere have I found any discussion whether the NRI is supposed to include (or not include) NRE and FCNR income when calculating his “Total Income” for Schedule AL.
(a) Does “Total Income” here mean only income derived/accrued by the NRI that is potentially taxable in India? OR
(b) Does NRE and FCNR exempt income need to be added for calculating “Total Income”?
(c) If (b) is true, which currency conversion factor (on which date) should be used to convert FCNR currency value to India Rupee value and where can one find this factor?
Would you please shed some light on all this?
Thanks very much!
Hi Deepesh
NRI Hedging his FCNR receipts through INR forwards will the gains if any be taxed.
or NRI books forwards in INR for future remittance of funds to India for family expenses and later on cancel the forward then Gain arising on such forwards will be taxable or not?
Thanks in advance