NRO, NRE or FCNR term deposit: Which one to pick?

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NRO, NRE or FCNR term deposit: Which one to pick?

Deepa Venkatraghvan May 11, 2012, 08.28PM IST

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The rupee has been in slide mode for some time now and in order to arrest that fall, the Reserve Bank of India (RBI) has been taking several steps to attract dollars into the country. One slew of changes were introduced in December 2011 when the central bank deregulated interest rates on Non Resident Ordinary (NRO) savings accounts and Non Resident External (NRE) term deposits. As a next step, earlier this month, the RBI also freed up interest rates on the Foreign Currency Non Resident (FCNR) Account. The result: a significant spike in interest rates on all these accounts.
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For NRIs, this is great news. They now have a choice of 3 attractively priced term deposit accounts in India: NRO, NRE and FCNR. The table gives you a snapshot of the features of the 3 types of term deposit accounts. FeaturesNRO Term DepositNRE Term DepositFCNR Term DepositSource of fundsNRO savings account (local rupee earnings)NRE savings account (foreign funds or certain repatriable rupee funds)Foreign funds (cheque or wire from overseas bank account or currency or travelers cheque)Interest rate7-9% depending on amount, term and bank7-9% depending on amount, term and bankOn USD deposits: 3%-4% depending on term On Euro deposits: 3%-4.5% depending on term On GBP deposits: 4%-5% depending on termRepatriabilityPrincipal and interest will be credited to the NRO savings account. Balance in NRO savings account can be repatriated up to USD 1 million per financial year.Principal and interest credited to NRE savings account and can be freely repatriated.Principal and interest can be freely repatriated.Tax impactInterest is taxable. Tax is deducted at source at 30%.Interest is tax free in India. However, it would be taxed in your country of residence depending on tax rules applicable there.Interest is tax free in India. However, it would be taxed in your country of residence depending on tax rules applicable there.Currency riskCurrency risk exists. If rupee depreciates further at time of maturity and repatriation, you will lose.Currency risk exists. If rupee depreciates further at time of maturity and repatriation, you will lose.No currency risk as you invest in foreign currency and withdraw in the same currency. Data from the RBI suggests that FCNR balances have always lagged behind balances in the NRE accounts. As of Feb 2012, while FCNR balance was at $15.54 billion, the same in NRE accounts was $29.94 billion. Certified Financial Planner Gaurav Mashruwala says, "The NRE account allows an NRI to maintain a savings as well as term deposit account while FCNR is

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NRO, NRE or FCNR term deposit: Which one to pick? - Times Of India

http://articles.timesofindia.indiatimes.com/2012-05-11/us-canada-news/...

only a term deposit. Perhaps this, and the fact that NRE accounts are rupee accounts, makes it operationally convenient for investors to opt for the NRE term deposit. Another issue is that not many investors may be aware of the FCNR deposit since for the longest time, interest rates were barely around 1%." But today, given the volatile relationship between the rupee and the dollar, FCNR deposits, with deregulated interest rates, might provide a currency hedge to investors. How to choose: Over the years, the RBI has made repatriation fairly liberal. While you can freely repatriate NRE and FCNR balances, NRO account balances are repatriable up to USD 1 million per financial year. So this feature may not be an important consideration for most. What would be important though are tax and currency risk. Check tax impact Interest on the NRO account is taxable and for NRIs, tax is deducted at source at 30%. In case of a Double Taxation Avoidance Agreement (DTAA) between India and other countries, this TDS rate would be lower. For instance, the DTAA between India and the US lays down a TDS rate of 15% on interest from deposits in India. These deposits may also be taxed in the country of your residence. The US, for instance, taxes global income of its residents and citizens. However, if tax has been deducted at source in India, the investor will get a credit in the US for taxes paid in India.
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Interest on the NRE account and FCNR account are tax free in India. However, countries like the US, which levy tax on global income of its residents and citizens will tax this income. So while interest on NRE and FCNR accounts maybe tax free in India, a US resident or citizen would have to add this interest to his total income in the US tax return and pay taxes thereon. For NRIs in tax free zones like the Gulf region, the NRE and FCNR option would work best. For residents of the US, the choice would depend on the tax slab applicable in the US. Assess currency risk Currently, the rupee-dollar relationship is extremely volatile. In such times, currency risk is an important consideration while making investments in India. Let us consider an example to understand this. You invested $ 20,000 in a rupee deposit when the rupee was at 53. Let us say that at maturity, after 1 year, the rupee touches 55. Here are your gains:
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NRO, NRE or FCNR term deposit: Which one to pick? - Times Of India

http://articles.timesofindia.indiatimes.com/2012-05-11/us-canada-news/...

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Readers' opinions (28)

Sort by: Newest | Oldest Raj (NA) 31 May, 2012 09:38 PM By far very good info for NRIs . I just wonder how many usa residents while filing taxes in USA include the NRE/FCNR interests on tax returns. Now that USA is getting very strict on it, that may scare NRIs from sending money to India. sam (kol) 16 May, 2012 03:26 PM Even though the rules falk about 1M repatriation annual ability from NRO accounts, banks make it very difficult to actually do so citing many other clauses etc. My advise is to invest through NRO route ONLY if you dont need the money overseas Sujay (Nagpur) 15 May, 2012 03:54 AM If the rupee keeps falling, it is possible that RBI will remove the ceiling on FCNR rates (maybe for a short time). Freeing the NRE deposit rates and other measures have not worked. With the Indian economy in ICU the RBI will need to do something with FCNR as it will also encourage FIIs to deposit money for longer durations. Wait until then. Also note that there are hidden costs in these transactions. If the rupee is at 54 and you send dollars then you get an exchange rate of 53.5 and have to pay service charges. When you repatriate then the exchange rate would be 54.5 and again you have to pay service tax. So you end up loosing close to 2Rs per dollar in the entire transaction. dinesh shah (abudhabi uae) 14 May, 2012 09:34 PM good information to NRIs from different countries Rama (Hyd) 14 May, 2012 08:15 PM INFORMATIVE....Thanks! READ ALL COMMENTS

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