Category: NRI

In a prior post I compared FMPs (Fixed Maturity Plans) with bank fixed deposits, and said that if you are in the higher tax bracket, the tax advantage of FMPs tilt the balance in their favor somewhat (if you can live with the uncertainty).

That’s true for domestic investors but what about NRIs?

Allwyn left the following comment on the Suggest a Topic page a few days ago:

allwyn September 4, 2012 at 12:59 am [edit]

Hi,
Could you pls. explain the advantages/disadvantages of FDs(presently int. rates of over 9% tax free) over FMP/Debt funds for NRI’s

Thanks in advance

Allwyn

This is an interesting question, and in my mind since it’s only the tax advantage that makes you think of FMPs over fixed deposits for domestic investors, you need to look at the tax angle to answer this question for NRIs as well.

For close to a year now, NRE fixed deposits are tax free, and this was one step by RBI to arrest the Rupee slide. This means that NRE fixed deposits are currently better than NRO fixed deposits, and they are an obvious competitor to NRI investments in FMPs.

I didn’t know how FMPs are taxed for NRIs but this DSP BLACKROCK page on NRI taxation states that NRIs will be taxed at their applicable assessee rate in case of short term capital gains, and will be taxed at 10% without indexation or 20% with indexation for long term capital gains on non – equity mutual funds.

Since most FMPs are slightly over a year to make them count under long term capital gains, this means that most of the time your NRI FMPs will taxed at 10% whereas the returns from your NRE fixed deposits are tax free.

I think in general it is easier to open a NRE fixed deposit than it is to buy a FMP for NRIs, so that’s another thing in their favor along with the fact that you know before hand how much your fixed deposit will earn.

If the tax situation for NRIs change as far as FMPs are concerned then this might be worth a re-look but until then I can’t think of a good reason to favor FMPs instead of FDs for NRIs.

This post was from the Suggest a Topic page.

RBI liberalized the NRE interest rates last month, and allowed banks to set their own interest rates like they did for the savings bank account interest rates.

Prior to this, it made no sense to open a NRE account for the interest rate because you got a lot higher rate in the NRO account even after tax deduction.

But with this change, now you can get extremely high rates of interest in the NRE account and the interest in this account is tax free as well!

The recent rupee fall contributed to this move, and these are very good rates for NRIs who live in western countries with low interest rates and don’t have a lot of safe options to put their money at work.

I’ve made a list of the banks with the best NRE interest rates that I could spot along with the tenure, and if you see any banks missing from this list then please let me know and I’ll update this list.

Here are a couple of other posts that are related and might be useful as well – the first one explains the difference between a NRO and a NRE account and the second one talks about how you can open a NRE or NRO account while you are abroad.

Now here is the list.

S.No.	Bank	Tenure	Interest Rate
1	Karur Vysya Bank	1 year to 2 years	10.00%
2	City Union Bank	1 year and less than 3 years	10.00%
3	Tamil Nadu Mercantile Bank	1 year – less than 2 years	10.00%
4	Karnataka Bank	1 year to less than 2 years	9.75%
5	Dena BankÂ	1 year only	9.60%
6	State Bank of Travancore	1 year to less than 2 years	9.50%
7	South Indian Bank	1 year to 2 years	9.50%
8	Corporation Bank	1 year to less than 2 years	9.50%
9	IDBI Bank	1 year 1 day – 10 years	9.50%
10	J&K Bank	2 years to less than 5 years	9.50%
11	Federal BankÂ	1 year only	9.50%
12	Indian Bank	1 year to less than 3 years	9.50%
13	Andhra Bank	1 year	9.40%
14	Central Bank of India	1 year to less than 2 years	9.25%
15	Vijaya Bank	1 year to less than 2 years	9.25%
16	Bank of Baroda	1 year to less than 2 years	9.25%
17	ICICI Bank	390 / 590 / 990 days	9.25%
18	HDFC Bank	1 year 16 days	9.25%
19	SBI	1 year – 10 years	9.25%

Updated on Jan 9 2012

A few days ago I wrote about how you could open a NRE / NRO account while still abroad, and some people had a question on which is the better among the two.

Like most other things – it depends on what your specific needs are but now the big difference in NRO and NRE accounts is that the fixed deposits that you open in your NRE account are tax free in India. Here is a list of some of the best NRE fixed deposits with Indian banks.

Here is a post with differences between the two accounts, and you can go through these main points to see which one suits you most.

Difference between NRO NRE  Accounts

1. Interest on NRE account is tax free where NRO is taxable in India: It used to be that NRE accounts paid a lower interest than NRO accounts, but recently RBI allowed banks to set up their own NRE rates, and as a result now NRE fixed deposits pay as much as a NRO fixed deposit.

The big difference is that there is no tax in India on the interest on this NRE account, so it makes much more sense to open a fixed deposit using a NRE account instead of a NRO account.

2. NRE accounts are tax free whereas NRO accounts are not: You don’t have to pay any taxes on your NRE account, but interest income on the NRO deposit is taxed in India. There was a comment the other day from a reader stating that NRO tax rates have gone down, but I can’t find confirmation of that anywhere, so if you have any information on that then please leave a comment.

3. Up to a Million Dollars is Repatriable in NRO Account: Repatriable in this context means money transferred from India to another country, and it used to be that money from a NRO account wasn’t repatriable at all.

However, RBI has made some changes and now up to a million dollars can be repatriated from a NRO account in a year. However, a friend who was trying to do this told me that it’s a bit of a hassle transferring money from NRO account when compared with a NRE account.

If you foresee the need to repatriate more than a million dollars then you should opt for a NRE account.

Conclusion on NRO NRE Comparison

A lot of NRIs need a bank account back in India because they plan to return some day in the future or they have to maintain their family still in India. So you need something back in India – either a NRO or a NRE account.

I’ve seen the rules change in such a way for these accounts that for a long time it made sense to have a NRO account but not a NRE account, and now the situation has been reversed.

When you open an account – the bank gives you an option to choose if you want to open one or both, and you should choose both at the time so that you don’t have to go through the lengthy process of submitting documents and opening a new account in case the rules change again.

Update: Deleted the tax saving line as pointed out by Satie below.

NRE (Non Resident External) and NRO (Non Resident Ordinary) are two types of accounts that NRIs (Non Resident Indians) can open if they need a way to transfer money, open a fixed deposit, or buy mutual funds, and stocks in India.

What follows is a sequence of events that will take place, and some pointers that you might find useful while getting a NRE or NRO account.

How to open a NRE or NRO Account?

1. Contact the Bank

There are usually two ways of getting in touch with a bank: either have them call you, or you call their helpline.

Banks like HDFC and HSBC have this option where you can fill up a contact form and then their representative calls you. Whereas SBI lists out its call center numbers for various countries and you can call them to discuss opening an NRE / NRO account.

The first step is to talk to a bank representative because once you talk to the rep – he will inquire which account you need to open, whether it’s joint or single account, and accordingly tell you what documents you need to open the account, and email you the forms as well.

2. Book an appointment to fill the form

Don’t be daunted if you see a big 10 page attachment in your email. The paperwork is not as intimidating as it looks. It will take about 20 minutes to fill up, and can’t be done on your own, but it’s not all that bad.

Because you need help to fill up the form – the bank rep will book an appointment with you (usually telephonic) to go over the forms and walk you through them.

You will have to print them ahead of time and you can fill the easier sections yourself. Leave anything you’re not sure of because there are a lot of things there that aren’t very intuitive. For instance at one point you will encounter a question asking you if you’re politically exposed, and you’ll be tempted to say hell yeah – I’ve been  exposed so bad I’m radioactive. While that may be true, it’s not what they’re asking. So, don’t try to fill the entire form without their help.

Oh, and keep a black pen handy; filling up tons of information while on the phone is a pain in itself – you don’t want to make it worse by having to hunt for black pens!

There are a lot of parts that they will just ask you to skip over or leave empty, so it’s really not as bad as it looks.

3. Get the documents ready

They will ask for documents based on your country of residence and what type of account you’re opening but here are some common ones that you should be ready with.

• Copy of first and last page of passport
• Copy of the visa page on your passport
• Two residence proofs – this can be things like your driver’s license, phone or utility bills, bank statements, pay – stubs etc.
• The filled up account opening forms.
• Passport photograph.

On their website – some banks have asked for these to be notarized, but in reality they don’t always need that. Self – attested documents also do, which is nothing more than signing on every document yourself.

4. Write  a check in USD or your currency

You will need to write a check in order to open the account, and this can be done in USD or a few other foreign currencies. They will tell you if you can give the check in the currency of your country, or the alternative if that’s not possible.

5. Mail it to the PO Box or India Address

In some cases the banks will have a PO Box in your country of residence where you can send the documents instead of sending it to India.

However, before you decide to mail the documents to the PO Box check with them to see if there is a difference in processing time if the documents are sent to a PO Box instead of the India address.

These documents are generally processed in India, and sending your documents to a PO box may add to a delay of as much as 15 – 20 days, so before you decide where to send the documents it’s better to check with them on what they advise, and what the difference in cost is.

The bank rep will follow up with you and its a good idea to email him letting him know that you’ve mailed the documents so they can keep a track of when they receive it, and help in processing.

The one thing that’s missing from this post is recommendation on where to open an account, and that’s because I have no answer to that and nor do I have a reasonable way to compare one bank with another. You can choose one with which you’ve had good experience in the past and I’m afraid I don’t have much more input on that.

I’m really keen to hear on your experience with opening an NRE or NRO account so please do share that in comments, and of course all questions and other observations are welcome.