Latest personal finance news and trends in India
In a move that would be helpful to many, RBI through a circular issued on May 7, 2012 has further liberalized the foreign exchange remittance limit. The limit for foreign exchange remittance for miscellaneous purposes without documentation formalities, has been raised from USD 5000 to USD 25000 with immediate effect.
The circular states that Authorised Dealers need not obtain any document, including Form A-2, except a simple letter (from the applicant containing the basic information, viz., names and the addresses of the applicant and the beneficiary, amount to be remitted and the purpose of remittance) as long as the foreign exchange is being purchased for a current account transaction, and the amount does not exceed USD 25000 or its equivalent and the payment is made by a cheque drawn on the applicant’s bank account or by a Demand Draft.
In a significant change announced on May 7, 2012 through a circular, RBI has said that the NRIs/PIOs may be permitted, subject to payment of applicable taxes, to transfer repatriable funds from their NRO account within the overall ceiling of US $ 1 million per financial year, for credit to their NRE account in India. At present transfer of funds from NRO to NRE account is not permissible.
RBI through its circular announced the following:
On a review, it has been decided that henceforth NRI as defined in Foreign Exchange Management (Deposit) Regulations, 2000 contained in Notification No. FEMA.5/2000-RB dated 3rd May 2000, as amended from time to time, shall be eligible to transfer funds from NRO account to NRE account within the overall ceiling of USD one million per financial year subject to payment of tax, as applicable (i.e. as applicable if funds were remitted abroad). Such credit of funds to NRE account shall be treated as eligible credit in terms of paragraph 3(j) of Schedule-1 of Notification No. FEMA.5/2000-RB dated 3rd May 2000.
This is clearly great news for NRIs/PIOs who had funds in NRO accounts and wanted to move them into NRE accounts which are repatriable into foreign currencies.
Effective from January 01, 2010, banks in India offering NRE deposits have reduced their interest rates. For NRE fixed deposits of 1 to 2 years term, the new interest rate is 2.77%. The interest rate is 2.76% for a term of 2 years and above but less than 3 years. For a NRE deposit of 3 years and above, upto 5 years the interest rate is 3.31%.
Non-Resident External (NRE) and Foreign Currency Non-Resident fixed deposit rates have been cut by banks in India effective from April 1, 2009.
The new NRE interest rates are as follows:
|1 year to less than 2 years||3.72|
|2 years to less than 3 years||3.15|
|3 years to less than 5 years||3.45|
The new FCNR fixed deposit rates are as follows:
|1 year to less than 2 years||2.97||2.83||3.07||2.98||4.92||1.94|
|2 years to less than 3 years||2.40||2.82||3.12||1.92||4.38||1.78|
|3 years to less than 4 years||2.70||3.16||3.50||2.22||4.83||1.85|
|4 years to less than 5 years||2.99||3.45||3.82||2.43||5.23||1.92|
NRE accounts are held in rupees and both the deposit amount and interest are completely repatriable. FCNR accounts are held in a foreign currency and in these accounts as well both the fixed deposit amount as well as interest earned are repatriable. Both NRE and FCNR accounts are not subject to taxes in India and that forms one of the attractions of these accounts to NRIs.
Note that all banks in India (public sector, private sector and foreign) offer the same interest rates on NRE and FCNR fixed deposit accounts. Note that you can also open a NRE savings account for which the interest offered is 3.5%. There is no savings account option for FCNR accounts.
Ratekhoj is a source for the latest NRE and FCNR fixed deposit interest rates.
There are several options available for NRIs considering opening a account in an Indian bank: Non-Resident Ordinary (NRO) Savings Account, NRO Fixed Deposit Account, Non-Resident External (NRE) Savings Account, NRE Fixed Deposit Account and Foreign Currency Non Resident (FCNR) Fixed Deposit Account.
Each of these account types has certain advantages and disadvantages. Understanding them can help you in making a choice. Factors to consider include:
- Source of the funds in the account: Are the funds to be deposited in these accounts from sources in India or abroad?
- Currency in which the account is maintained and associated currency rate risks if you want to convert back into the foreign currency: Do you intend to repatriate the currency back to your country of residence at some point?
- Repatriability: Can you convert back to the foreign currency?
- Taxation in India on the principal and interest earned: Do you have to pay taxes for the money in India?
- Ability for an Indian resident to operate the account with a mandate: Can a family member in India operate the account with a mandate card issued by the bank?
- Can the account have a Indian resident as a joint account holder? Note that this is different than having a family have the ability to withdraw funds from the account as a mandatee.
Key aspects of NRE accounts are as follows:
- NRE accounts are maintained in rupees. This means that the foreign currency is converted to Indian rupees at the prevailing foreign exchange rates when the money is deposited into the account.
- The primary source of funds deposited into NRE accounts must be from your earnings abroad. In other words, you cannot deposit money from sources in India such as house rent or pensions in this account.
The principal amount and the interest are fully repatriable (can be converted to any foreign currency). The conversion back to foreign currency is done at the prevailing forex rates.
Interest income earned on the money in a NRE account is non-taxable in India. However, it may be taxable in your country of residence as per that country’s tax rules.
You can only have other NRIs as joint account holders on NRE accounts. Resident Indians cannot be joint account holders in NRE accounts with NRIs.
Key aspects of NRO accounts are as follows:
- NRO accounts are maintained in rupees. This means that the foreign currency is converted to Indian rupees at the prevailing foreign exchange rates when the money is deposited into the account.
- The source of funds deposited into NRO accounts can be from India or abroad. NRO accounts are appropriate for NRIs who have had earnings in India earlier and became NRIs later as well as NRIs with income from sources in India such as house rent, pensions etc. You an also deposit money from your earnings abroad or transfer money from a NRE account into a NRO account.
Current Income like rent, dividend, pension can be remitted abroad through the NRO account. Funds which can be repatriated from the NRO are subject to a maximum limit of USD 1 million per financial year. Repatriability is subject to conditions.
Interest income earned on the money in a NRO account is liable for taxes in India.
You can have other NRIs or resident Indians as joint account holders on NRO accounts.
Key aspects of FCNR accounts are as follows:
- FCNR accounts have to be opened and maintained in the foreign currency itself.
- The source of funds deposited into FCNR accounts have to be from sources abroad. They can also be from your other NRE or FCNR accounts.
- The principal amount and the interest are fully repatriable
- Interest income earned on the money in a FCNR account is non-taxable in India. However, it may be taxable in your country of residence as per that country’s tax rules.
You can only have other NRIs as joint account holders on FCNR accounts. Resident Indians cannot be joint account holders in FCNR accounts with NRIs.
NRE and FCNR accounts have the advantages of not having to pay taxes in India which could be a hassle for NRIs trying to figure out the tax rules in India as well as their country of residence.
People opening NRE accounts and would like to repatriate their funds at some point must consider the foreign currency conversion rates at the time the funds are being deposited versus the time when the funds have to be repatriated. This can carry risks as well as rewards depending on the forex rates trend. For example, if $1000 is converted to Indian rupees at Rs. 50 per dollar and then converted back to dollars at a conversion rate of Rs. 40 per dollar, then you would get back $1250 for a good gain. On the other hand, if the dollar is at Rs. 55 per dollar, you would lose some of your principal when you do the repatriation.
FCNR accounts do not carry any forex rate risk as the accounts are always maintained in the foreign currency.
NRO accounts have the advantage of being able to deposit funds from both sources in India and abroad and having joint account holders in India. Repatriability of funds is a disadvatage for NRO accounts.
The key advantage of NRO fixed deposit accounts is the substantially higher interest rates as compared to FCNR and NRE accounts. Check Ratekhoj for latest NRO fixed deposit interest rates offered by various banks in India. The rate of interest offered is different in different banks and also depends on the fixed deposit tenure. So your choice of which bank to open a account in can depend on the interest rates.
FCNR and NRE fixed deposit accounts typically yield much lower than NRO fixed deposit accounts. Check Ratekhoj for latest FCNR and NRE rates. Most banks in India offer the same interest rate for FCNR and NRE fixed deposit accounts. So if you are planning to choose a bank for your NRE or FCNR fixed deposits, interest rates offered is not a consideration.
Both NRE and NRO savings accounts yield 3.5% currently. There is no savings account option for FCNR accounts.
NRE Savings and NRO Savings accounts allow you to have family members in India as mandate holders whereas you cannot have mandatees for the fixed deposit options available in NRE, NRO and FCNR accounts. Mandate holders can withdraw funds from your accounts in India with some type of a card such as a debit card of a ATM card. They can also withdraw funds at the bank locations. Banks such as Citibank allow you to even specify certain conditions on the amounts of withdrawals allowed per month on the operations of the mandatee.
Most banks also provide for taking loans for a certain percentage of your existing balance on your NRE, NRO and FCNR fixed deposit accounts. Check with the banks for details on loans.
The Indian rupee has weakened today against the US dollar to a level of Rs. 50.91/92 per dollar on increased demand for the dollar from importers as well as weaker trends in the the domestic stock markets. The rupee is however off its lowest levels of Rs. 52.20 per dollar hit in early March.
A stronger rupee helps importers but it hurts exporters of products from India.
Many banks in India have raised the interest rates for Non Resident External (NRE) and Foreign Currency Non Resident (FCNR) fixed deposit accounts effective from November 17, 2008. NRE accounts are rupee denominated accounts that can be opened by Non Resident Indians and have fixed deposit terms ranging from 1 year to 5 years. FCNR accounts can be opened by Non Resident Indians and are denominated in 6 different foreign currencies - US Dollars, Canadian Dollars, Euros, Sterling Pounds, Australian Dollars and Japanese Yen.
NRE term deposits for a period of 1 year to 2 years will now yield 4.92%, while those for a term of 2-3 years will yield 4.41%. NRE deposits for a period of 3 years upto 5 years will now give an interest of 4.89%.
FCNR accounts denominated in US dollars will yield 4.17% for a term of 1 to 2 years, 3.66% for a term of 2 years to 3 years, 4.14% for a term of 3 years to 4 years, 4.49% for a term of 4 years to less than 5 years and 4.76% for a term of 5 years. The table given below gives the complete table of FCNR interest rates:
|1 year to less than 2 years||4.17||5.87||7.01||4.17||7.28||2.16|
|2 years to less than 3 years||3.66||4.59||5.18||3.26||6.14||1.87|
|3 years to less than 4 years||4.14||4.70||5.32||3.52||6.44||1.94|
|4 years to less than 5 years||4.49||4.81||5.42||3.70||6.66||2.05|
Most banks offering FCNR and NRE accounts in India have announced this increase in interest rates including State Bank of India, Syndicate Bank, Allahabad Bank, Bank of Baroda, Corporation Bank and State Bank of Mysore.
Oct 17, 2008, Ratekhoj.com. Several banks in India have hiked the interest rates on Foreign Currency Non Resident (FCNR) and Non Resident External (NRE) accounts effective immediately. The increase of 50 basis points (or 0.50%) in interest rates in NRE and FCNR accounts is based on changes in Reserve Bank of India guidelines.
SBI, PNB, Dena Bank, Syndicate Bank are among the banks that have increased the FCNR and NRE rates. The FCNR rate changes impact deposits in US dollars, Euros, Canadian dollars, Japanese Yen and Australian dollars.
With these changes NRE rates for a term of 1 to 2 years stands at 4.96%. The rates for a term of 2 to 3 years is 4.27% and rates for terms of 3 years and above are 4.56%.
FCNR accounts denominated in US dollars earn a interest of 4.21% for a deposit term of 1 to 2 years. Euro accounts for the same term of 1 to 2 years will earn a interest of 5.74%. US dollar FCNR accounts for a maturity period of 5 years earn a interest of 4.14%. The following table provides a complete listing of current FCNR rates:
|1 year to less than 2 years||4.21||5.74||6.77||5.05||8.05||1.47|
|2 years to less than 3 years||3.52||4.87||5.57||3.27||6.55||1.36|
|3 years to less than 4 years||3.81||4.84||5.50||3.42||6.56||1.46|
|4 years to less than 5 years||3.95||4.87||5.46||3.55||6.61||1.55|