NRI Investments in Fixed Deposits

Indians, including the Non-Resident Indians (NRIs) are traditionally low-risk investors preferring to park their money in Fixed Deposits. The general tendency is to ensure capital protection over higher returns and liquidity. To provide liquidity for daily transactions and to provide banking support to route investments in India, NRIs are allowed to open Savings accounts in Indian banks. Also, they are allowed to deposit their money for a chosen term with a fixed interest rate, which is called Fixed Deposit Account or Term Deposit Account.

NRI bank accounts are categorized into three types:

  1. Non-Resident External (NRE)
  2. Non-Resident Ordinary (NRO)
  3. Foreign Currency Non-Resident (FCNR)

Non- Resident External (NRE) Accounts

NRE accounts are primarily for NRIs who wish to remit their earnings abroad to India bank accounts. The account converts foreign currency deposits to Indian rupees at the prevailing currency exchange rate. The NRE accounts can be opened only by remittances from foreign currency and funds in Indian Rupees from any other resident accounts cannot be transferred to these.

NRE Savings Account: This is a savings account/transaction account that lets an NRI transfer the earnings abroad to an Indian Rupee account. This account also facilitates routing of the funds earned abroad, to other investments such as equity, mutual funds, bonds etc.

NRE Fixed Deposit Account: This is fixed-term deposit account in which the interest rate is fixed by the bank for an agreed term. This is a low-risk investment with returns on the lower side. NRE Fixed Deposits (FDs) can be redeemed before the expiry of the term at a lower interest rate.

Eligibility: Any Indian citizen or Person of Indian Origin (PIO) who qualifies as an NRI for tax purpose can open an NRE account provided the individual is working abroad. If an Indian resident becomes an NRI, then the existing resident accounts cannot be converted into an NRE account. NRE account can be jointly held with another NRI but not with an Indian resident.

Taxability: The interest and principal warned on both NRE Savings account and NRE Term Deposit account are tax-free in India. However, if an NRI decides to return to India and becomes a resident for tax purpose, the interest earned on NRE accounts becomes taxable in India. However, the interest earned from these accounts may be taxed as “foreign income” in the country of residence of NRIs.

Repatriation: The interest and principal from both NRE savings and fixed deposit accounts can be repatriated at any time as convenient to an NRI.

Non- Resident Ordinary (NRO) Accounts

NRO accounts are primarily to manage and maintain income earned in India by an NRI such as rent, dividend, pension, interest, etc. An NRI can also remit any amount of earnings from abroad to an NRO account, at the prevailing exchange rate, but the rules restrict the repatriation from NRO accounts to one million USD per annum. NRO accounts accept funds in Indian Rupees from other Resident accounts and from the NRE savings account.

NRO Savings Account: This is a savings or a transaction account in which income in India can be received. The funds in this Rupee account can be diverted to investments like equity, bonds, etc., but repatriation of the invested capital is not allowed.

NRO Fixed Deposit Account: This a fixed-term deposit account where the bank fixes the interest rate for the entire deposit period. The NRO deposit account can be opened either by income earned in India or by remittances from earning abroad.

Eligibility: Any person who qualifies as an NRI for tax purpose can open an NRO account. If an Indian citizen becomes an NRI, the resident account should be mandatorily converted to an NRO account. The NRO accounts also allow joint holding between an NRI and an Indian citizen.

Taxability: The interest earned on both NRO Savings and Fixed Deposit accounts is subject to a tax at that rate of 30% for NRIs. This interest rate after tax is deducted at source (TDS) is credited to the NRO account. If the total Indian income of an NRI is below 250,000 INR, a refund can be claimed by filing tax returns for that year. The interest earned on these NRO accounts might be taxed in the country of residence of the NRI as “global income”. However, if there is a Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of an NRI, there is a possibility of getting tax relief on the income.

Repatriation: The interests earned on both NRO Savings and NRO Fixed Deposit accounts can be repatriated but not the principal. The maximum amount that can be repatriated from an NRO account is one million USD per annum and the same limit applies if an NRI wishes to transfer from an NRO account to NRE account.

Foreign Currency Non- Resident (FCNR) Accounts

FCNR accounts are exclusive Term deposit accounts that enable NRIs to invest in foreign currency, without the hassle of converting to Indian Rupees. This account enables an NRI to hold the funds in a foreign currency of own choice without subjecting the investments to Currency Exchange Risk. FCNR accounts can be opened by direct remittance from earnings abroad or by transfer from NRE account or by depositing traveler’s checks or foreign currency notes in person, at the bank.

Eligibility: Any Indian citizen or Person of Indian Origin (PIO) who qualifies as an NRI for tax purpose can open an FCNR account provided the funds invested are from earnings abroad. FCNR account can be jointly held by an NRI with an Indian resident.

Features: FCNR Deposits can be maintained in any currency permitted by the Reserve Bank of India (RBI). Currently, FCNR Deposit can be held in eight major currencies of the world. The term of FCNR deposit is minimum one year and maximum five years.

Taxability: The interest earned from an FCNR account is tax-free in India. However, the same might be taxed in the country of residence of NRI.

Repatriation: The entire interest and the principal from an FCNR account can be repatriated freely.

Limitations: The FCNR Deposit account is a major draw for NRIs who wish to utilize the higher interest rates in India, to lock their funds. However, there are certain limitations which an NRI should be aware of before locking the funds in an FCNR deposit.

  1. The maximum credit guarantee in India is 1,00,000 INR, which is very low. If the deposit has been made at weaker banks, the bank might not be able to repay it back to the NRI, which would result in a major loss of capital.
  2. If the FCNR deposit is withdrawn before the minimum term of one year, no interest is paid.
  3. Though the interest earned on FCNR deposits is tax-free currently, the Income Tax laws are subject to change depending on the policies framed by the Government of India.