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.
- Local disbursements in India
- Transfer to other NRE/FCNR accounts
- Remittance outside India
- Investments in shares/securities, mutual funds and real estate in India
- 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.
- 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
- 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.
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