Double Bonanza for non-resident Indians

The Reserve Bank of India has recently deregulated interest rates on NRE rupee deposits which are beneficial to NRIs who wish to deposit their surplus funds with banks in India. There are, however, some caveats that NRIs should remember before investing in bank deposits in India 

The Indian rupee has been depreciating for the last several weeks and from around Rs44 to a dollar, it has now reached a level of around Rs53 and is hovering in the range of Rs52 and Rs54 to a dollar at present. This nearly 20% depreciation of the rupee has proved to be a blessing in disguise for the non-resident Indians (NRIs), as they not only get more rupees for their dollars, but also higher tax-free interest on their non-resident external (NRE) rupee deposits, now that Reserve Bank of India (RBI) has deregulated interest rates offered by banks on NRE rupee deposits.

With the burgeoning foreign exchange reserves of the country, the rates of interest payable by banks on NRE deposits till recently were regulated by the RBI and it was linked to London Inter-Bank Offered Rate (LIBOR). So the rate offered by banks on NRE rupee deposits were as low as 3% to 4% per annum and the banks had no freedom to offer anything higher than these regulated rates.

With the recent sharp depreciation of the rupee, the RBI has taken a series of steps not only to stem the fall, but also to attract foreign currency into the country. One of the steps taken by RBI is to deregulate interest rates offered on NRE rupee deposits, and many banks in India have consequently during the last few days increased the interest rates on NRE rupee deposits to as high as 10% p.a. for fixed deposits of tenor varying from one to two years.

Let us go to the basics first. At present NRIs can place their surplus funds with banks in India in three different ways.

1. NRIs at the time of emigration to a foreign land would have had some savings with them. Besides even after becoming a non resident, they would be receiving interest, dividends, etc, on their earlier investments, or rent from their property owned by them but now leased out in India. All these funds can be deposited with banks in India in what is called as non-resident ordinary savings accounts (NRO). In fact, the savings bank accounts held by residents after they leave India on employment, etc, gets renamed as NRO accounts in which the NRIs can continue to deposit their local funds originated in India. These surplus funds can be invested in fixed deposits with banks, and they are also called as NRO deposits. These funds having originated in India are normally not repatriable without prior permission from the RBI. But now the RBI has allowed repatriation of these funds up to certain limits (presently up to $1 million a year) and subject to certain conditions. Besides, the interest earned on these NRO accounts is subject to tax deduction at source at a flat rate of 30.9%. NRIs whose total taxable income in India is less than the basic exemption available to individuals under the Income Tax Act can get back this TDS deducted as refund if they file their tax returns in India.

2. The second type of bank deposits allowed in India for NRIs is called NRE deposits. These are called non –resident external accounts, because the funds for opening and maintaining these accounts are required to be remitted from abroad as free foreign exchange. These funds received in foreign currency are converted into rupees and credited to either NRE SB account or NRE fixed deposit accounts of NRIs. The best advantage of the NRE accounts is that these funds along with the interest earned on these funds are fully re-patriable to a foreign country of their choice without any restrictions, whenever required by the depositor. Besides the interest earned on these deposits is totally free from Indian income tax.

3. The third type of bank deposits permitted for NRIs is in the form of foreign currency and they are called Foreign Currency Non Resident (FCNR) deposits. They can be kept in any currency which is freely convertible as defined in Foreign Exchange Management Act (FEMA), namely, US dollar, Canadian dollar, British pound, Euro currency, Japanese yen, Australian dollar, etc. They carry interest at the rates regulated by the RBI and linked to LIBOR and is fixed in the beginning of each month as per the procedure prescribed by the RBI. These deposits with interest are also freely re-patriable and the interest earned in the respective currencies on these deposits is also free from Indian income tax.

The interest rates offered by different banks for all the three type of deposits are subject to change and hence NRIs are advised to ascertain the rates offered by banks by visiting the website of their preferred bank before making investments in India. They can certainly shop for best rates available and decide on the bank most suitable having regard to their convenience and the quality of service rendered by the bank. What is liberalized by RBI last week was that it allowed banks the freedom to fix interest rates on NRE rupee deposits which was hitherto regulated and linked to LIBOR. The rates of interest for NRO fixed deposits were freed earlier and each bank is, therefore, now free to quote their own rates for both these type of deposits, subject to the condition that these rates cannot be higher than those offered by them on comparable domestic rupee deposits to Indian residents.

In order to facilitate smooth banking operations for NRIs in India, the RBI has recently permitted following facility to NRIs who wish to bank in India. With effect from 22 September, 2011, NRIs are permitted to open NRE/FCNR accounts with their resident close relative ( close relative as defined in Section 6 of the Companies Act, 1956) on former or survivor basis. The resident close relative shall be eligible to operate the account as a Power of Attorney holder in accordance with the extant instructions during the life time of the NRI/PIO account holder. 

There are, however, four caveats mentioned below that the NRIs should remember before investing in bank deposits in India.

1. NRE and NRO deposits, being denominated in Indian rupees, are subject to exchange risk. The rate of exchange being volatile and since nobody can predict the future, the Indian rupee can depreciate or appreciate depending upon the conditions of our country’s economy as well as the global economy. Therefore, when these funds are to be repatriated abroad on a future date, the exchange rate prevailing then will be applicable which may result in capital loss or profit. In short, the exchange gain or loss will be squarely on the shoulders of the NRI depositor.

2. Though income earned on NRE and FCNR deposits at present is tax-free in India, it may be taxable in the country where the NRIs live and they should, therefore, consult their tax advisor in the country of their residence to be clear about the tax implications of investing in India. There are certain double taxation avoidance treaties between India and many countries of the world, which may mitigate the tax burden to some extent, but this can best be ascertained from the tax advisor before investing in India.

3. The rules of investment in India by NRIs are framed by the RBI under the Foreign Exchange Management Act and with regard to tax by Government of India under Indian Income Tax Act and they are, therefore, subject to change from time to time. NRIs are advised to consult their financial advisor for any clarifications in this matter.

4. The chances of commercial banks in India going bust are remote, if past experience is any indication. Whenever any commercial bank is tottering, the RBI normally wears the hat of a marriage counselor and arranges to marry or merge a weak bank with a strong one, so that the depositors do not lose money, though shareholders may or may not get their full investment. But the same can not be said of co-operative banks.

(The author is a banking & financial consultant. He writes for Moneylife under the pen-name ‘Gurpur’)

Bhalachandra Singde
1 decade ago
Can Mr. Gurpur throw some light on the investments made by Oversees Indian Origins, who opted that country's citizenship, and are not termed as NRIs? If such persons wish to invest in India what are the benefits that they may get and what are the obligations on them?
Vinay Joshi
1 decade ago

[Pseudonym is of no use, identity can be established instantly.]

A dip in India’s foreign currency assets resulted in a $4.67 billion decline in the country’s forex reserves to $302.1 billion for the week ended December 16.

Foreign currency assets fell by $4.668 billion to $266.968 billion for the week, the RBI said.

When UAE, tax free, banks are offering attractive loans to expats for investments into NRE/FCNR a/cs why the same should be a concern?

Even 10% is an as offer by a private bank?

Will not talk of fiscal deficit but current a/c deficit is tantamount to financing domestic needs thro" foreign country savings!

What is our savings ratio to GDP?

The bearish trend escalated by Euro crisis esp in emerging markets has a breather as US is in resilience with Germany stable.

As a matter of fact inflation adjusted depreciating INR is on its path, good for growth instead of artificially depreciating it!

Before Q4 it should be at 49/49.5 or so, NRE/FCNR will have more returns which can wipe the cost of borrowing & enjoying the free iPad with the loan availed!! But no funds are coming.

Current a/c deficit reduction unlikely with rising fiscal but by June 2012 foreign currency debt repayment of 139Bn$ due - approx 43% of present reserves.

The funniest part is out of PIIGS [ Portugal, Ireland, Italy, Greece, Spain] Italy enjoys a rating 'A' downgraded from A+ with negative outlook.

The ECB's providing $645bn to Italy in three year tender is tantamount to support battered sovereign debts.

What is India's rating w/o sovereign debt probs?

No one will support India & we will be back to 1991 & the same person is bound to resolve it IF AT ALL SUCH A SITUATION ARISES! GOD FORBID!

No, with the present turmoil & macro economic situations anything possible.


Anil Agashe
1 decade ago
As usual banks are going over board with the high rates they are offering. How are they going to lend these funds? At what rates do they think borrowers will be attracted to borrow? The rates offered seem mindless. Their cost of borrowing is going to rise. RBI has paused and food inflation is down. So in the new year one may see reduction in interest rates.
Vinay Joshi
Replied to Anil Agashe comment 1 decade ago
Dear Mr. Anil Agashe,

Where is the liquidity in banking system?

Last Friday 23, banks borrowing stood at 1.73 trillion rupees, incremental 7K Cr over previous week [1.66trn]!

anil agashe
Replied to Vinay Joshi comment 1 decade ago
What are they doing with this money? Their NPAs are rising. It wld be better for RBI to cut CRR if banks need liquidity. That will be profitatable for banks than borrowing at such high rates.
Vinay Joshi
Replied to anil agashe comment 1 decade ago
Dear Mr. Anil Agashe,

What are they doing with this money? Your quest! Definitely they are not keeping it for themselves!

What is the correlation of borrowing – NPA – CRR? Please can you answer, if at all!

What is CRR?!

Last Friday 23, banks borrowing from RBI stood at 1.73 trillion INR.

Why should they borrow? Which high rates are you talking about? Hearsay!! Explain.

It seems my response to Gurpur was incomprehensible to you.

What is the banks borrowing rate & norms of their borrowing? from which sources?

Already leeway [-] 1% SLR there exceeded by 1.91%.
The Govt.’s fiscal arithmetic gone awry so this fisc borrowing heavily.

DEC 30, 15KCr bond issue, earlier 4KCR auction was cancelled.

As far as asset quality is concerned it’s diff an issue.
No CRR cut. It will be only when RBI wants to intervene in forex & mop-it-up against the $ released. Not in the near future. Its complex.


1 decade ago
dilip kr sarkar
1 decade ago
its a bonnza for our economy . kudos to RBI.
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