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By Rajkamal Rao
Go back to Finance: Core Banking in India
Indian banks primarily offer four types of accounts to returnees, who, in banking parlance are referred to as Non-Resident Indians. NRI accounts offer many benefits to account holders as India is hungry for foreign currency deposits and this is a fairly inexpensive way to fund ongoing government obligations. These special privileges are granted to incentivize NRIs to make investments with Indian banks. The four accounts are as follows, but in reality, the first three are the most popular.
Foreign Currency Non-Resident Account (FCNR). This is no different from a savings or certificate of deposit account held at a western bank. Account holders will open and operate the account in foreign currency (USD, GBP, EURO, etc). This is a highly attractive feature because account holders never have to assume exchange risk. Additionally, interest rates are much better than comparable products in western banks to compensate for the fact that these do not carry deposit insurance (such as FDIC in the US). Another outstanding feature of this account is that all income derived from this account is 100% tax free in India - in fact, taxes are not even deducted at source.
Non-Resident External (NRE) Rupee Account. This account requires the account holder to first convert his foreign currency holdings into INR. The account will be held and operated in INR throughout its life. When the account is closed, the account holder is at liberty to convert the balance (principal and interest) to the parent currency - without limits or permission from the RBI. This conversion (called repatriation) will take place at the exchange rate prevalent at the time of the repatriation transaction. Depending upon this exchange rate, the account holder could either benefit or lose - hence, account holders assume exchange rate risk with this type of account.
Let us illustrate this with an example. An account holder invests $10,000 in a 1 year NRE Fixed Deposit. The bank first converts the $10,000 to INR at the prevailing exchange rate (say 55 INR/USD) - and opens an account for INR 550,000. Assuming that the bank pays 9% interest on this deposit, once, at the end of the year, the interest earned is INR 49,500. The depositor is at liberty to repatriate principal and interest of INR 599,500.
Two scenarios are possible at repatriation. If the rupee has fallen against the dollar, say to 58, the repatriation will be worth $10,336 - a yield of 3.36%, far less than the 9% that the bank promised the account holder when the account was opened, but still much better than what western banks offer!
If the rupee has strengthened to 52, the repatriation will be worth $11,528 - a whopping yield of 11.5%!
Other than exchange rate risk, NRE accounts are identical to FCNR deposits. Interest income is 100% free of Indian income taxes.
Non-Resident Ordinary Account (NRO). The NRO account is similar to the NRE account - but with two important distinctions. First, the interest earned is fully taxable in India. Second, repatriation is limited to $1 Million each year [the $1 Million cap is still very generous, however].
Until December 2011, the interest rate differential between NRO and NRE accounts was substantial. On average, NRO rates were much higher (about 9%) on a 10-year term deposit compared to NRE rates of about 2.7% for the same term - to compensate for the restrictions on the NRO account. When the Indian Rupee took a beating on foreign exchange markets and began its free fall in the winter of 2011, the RBI quietly deregulated NRE interest rates. This prompted major banks to increase NRE interest rates - and attract valuable foreign exchange. The increase was so significant that within a matter of days, there was no difference between NRE and NRO rates. This has remained true for nearly 10 months - with the result that NRO accounts have lost most of their appeal. [Some investors who followed this trend closed down their long-standing NRO accounts, repatriated amounts back to foreign currency (even at a loss if the exchange rates were not in their favor) and re-opened new NRE accounts to take advantage of the tax free benefits that NRE accounts offer].
Resident Foreign Currency (RFC) Account for returning Indians.
State Bank of India, the largest public sector bank in India, summarizes the features of these accounts in the following graphic.
If you are a returnee who is a citizen of a western country, you should automatically qualify for NRI benefits since you are nominally considered not resident in India. Naturally, if you have a western passport, it becomes easier to prove this status. However, banks do not generally require you to continue to prove your NRI status year after year - so this matter should not be of much concern. It’s best to check with your bank and do all to ensure compliance.
If you are a permanent resident of another country but an Indian passport holder, or an Indian passport holder abroad on a work visa, you can open an NRI account but continued maintenance of it as an NRI after you return to India may present some challenges.
We recommend foreign citizen returnees to open an NRE savings account with a major public sector bank - and perhaps an NRE Fixed Deposit account with quarterly interest accrued to the savings account. The initial opening of the savings account is best achieved by a check/cheque drawn on a western bank. All future transactions are best handled electronically - through global remit or wire transfer.
While still in the US, it is best to open a Discover Bank Savings account (minimum balance $500). Discover does not charge for incoming international wire transfers so that you can easily repatriate money from INR to USD without worrying about annoying fees. Once the money is in, you can easily perform an ACH transaction from Discover to your current bank.
Go back to Finance: Core Banking in India
Indian banks primarily offer four types of accounts to returnees, who, in banking parlance are referred to as Non-Resident Indians. NRI accounts offer many benefits to account holders as India is hungry for foreign currency deposits and this is a fairly inexpensive way to fund ongoing government obligations. These special privileges are granted to incentivize NRIs to make investments with Indian banks. The four accounts are as follows, but in reality, the first three are the most popular.
Foreign Currency Non-Resident Account (FCNR). This is no different from a savings or certificate of deposit account held at a western bank. Account holders will open and operate the account in foreign currency (USD, GBP, EURO, etc). This is a highly attractive feature because account holders never have to assume exchange risk. Additionally, interest rates are much better than comparable products in western banks to compensate for the fact that these do not carry deposit insurance (such as FDIC in the US). Another outstanding feature of this account is that all income derived from this account is 100% tax free in India - in fact, taxes are not even deducted at source.
Non-Resident External (NRE) Rupee Account. This account requires the account holder to first convert his foreign currency holdings into INR. The account will be held and operated in INR throughout its life. When the account is closed, the account holder is at liberty to convert the balance (principal and interest) to the parent currency - without limits or permission from the RBI. This conversion (called repatriation) will take place at the exchange rate prevalent at the time of the repatriation transaction. Depending upon this exchange rate, the account holder could either benefit or lose - hence, account holders assume exchange rate risk with this type of account.
Let us illustrate this with an example. An account holder invests $10,000 in a 1 year NRE Fixed Deposit. The bank first converts the $10,000 to INR at the prevailing exchange rate (say 55 INR/USD) - and opens an account for INR 550,000. Assuming that the bank pays 9% interest on this deposit, once, at the end of the year, the interest earned is INR 49,500. The depositor is at liberty to repatriate principal and interest of INR 599,500.
Two scenarios are possible at repatriation. If the rupee has fallen against the dollar, say to 58, the repatriation will be worth $10,336 - a yield of 3.36%, far less than the 9% that the bank promised the account holder when the account was opened, but still much better than what western banks offer!
If the rupee has strengthened to 52, the repatriation will be worth $11,528 - a whopping yield of 11.5%!
Other than exchange rate risk, NRE accounts are identical to FCNR deposits. Interest income is 100% free of Indian income taxes.
Non-Resident Ordinary Account (NRO). The NRO account is similar to the NRE account - but with two important distinctions. First, the interest earned is fully taxable in India. Second, repatriation is limited to $1 Million each year [the $1 Million cap is still very generous, however].
Until December 2011, the interest rate differential between NRO and NRE accounts was substantial. On average, NRO rates were much higher (about 9%) on a 10-year term deposit compared to NRE rates of about 2.7% for the same term - to compensate for the restrictions on the NRO account. When the Indian Rupee took a beating on foreign exchange markets and began its free fall in the winter of 2011, the RBI quietly deregulated NRE interest rates. This prompted major banks to increase NRE interest rates - and attract valuable foreign exchange. The increase was so significant that within a matter of days, there was no difference between NRE and NRO rates. This has remained true for nearly 10 months - with the result that NRO accounts have lost most of their appeal. [Some investors who followed this trend closed down their long-standing NRO accounts, repatriated amounts back to foreign currency (even at a loss if the exchange rates were not in their favor) and re-opened new NRE accounts to take advantage of the tax free benefits that NRE accounts offer].
Resident Foreign Currency (RFC) Account for returning Indians.
State Bank of India, the largest public sector bank in India, summarizes the features of these accounts in the following graphic.
If you are a permanent resident of another country but an Indian passport holder, or an Indian passport holder abroad on a work visa, you can open an NRI account but continued maintenance of it as an NRI after you return to India may present some challenges.
We recommend foreign citizen returnees to open an NRE savings account with a major public sector bank - and perhaps an NRE Fixed Deposit account with quarterly interest accrued to the savings account. The initial opening of the savings account is best achieved by a check/cheque drawn on a western bank. All future transactions are best handled electronically - through global remit or wire transfer.
While still in the US, it is best to open a Discover Bank Savings account (minimum balance $500). Discover does not charge for incoming international wire transfers so that you can easily repatriate money from INR to USD without worrying about annoying fees. Once the money is in, you can easily perform an ACH transaction from Discover to your current bank.
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