Non Resident Gains -Ii

In an earlier article (Non resident gains, June 24, 1997), we had talked of the numerous deposit options available for NRIs and of the difficulty in picking the best scheme. There are several factors that come into play like interest rate differentials, forex market volatility and the need to repatriate savings and earnings. Ultimately, the decision has to be based on an individuals priorities and requirements. But there are some points that you can keep in mind when you select your account.

Choice of bank

Almost all the major banks are players in this field. The Indian Bank is one of the major players among the public sector banks. It prints monthly reports indicating not only the current rate of interest but also investment opportunities for NRIs.

 

The other major players in this market are the Credit Lyonnais Bank, Dresdner Bank, Standard Chartered, UTI Bank, HongKong Bank, Mashreq Bank, Deutschebank just to name a few (See: What the banks offer).

As most of the banks have comparable rates, how do you decide between a foreign bank and a nationalised bank? If you are a global NRI somebody with financial interests in various parts of the world it makes more sense to open accounts in the foreign banks. This will provide you with better access to your funds.

Alternately, if you need to remit funds from your accounts to remote areas within India, you need to operate your account from one of the authorised public sector banks as here they have better networking.

According to the chief manager, NRI branch of a leading public sector bank, Salaried people have the least requirement for repatriation so they should go for NRNR deposits because it earns them higher rates (up to 14.5-14 per cent in Indian Bank) and also gives them the option of partial repatriation.

A comparison of the yields of NRE and NRNR deposits (See: NRE vs NRNR) clearly indicates that if you invest Rs 1,000 for a short tenure of up to 12 months, an NRE deposit will on maturity give Rs 1,093, a yield of 10.93 per cent while the NRNR deposit will return Rs 1,153, an annualised yield of 15.3 per cent.

However, similar differences are not seen in longer tenures and of late, the scheme has started losing its charm due to the gradual reduction in the interest rate differential between the NRNR deposits and the NRE rupee deposit (which allows complete repatriation).

In fact, in an NRE deposit, both the deposit amount as well as the interest is fully repatriable while in an NRNR account, the interest on the deposit is totally repatriable while only 51.09 per cent of the principal can be repatriated within three years

Between the NRE and the FCNR deposit schemes, these days NRE appears to be more attractive because the Indian rupee is maintaining its strength in the forex market and is showing signs of keeping on this track in the near future, says a banker.

Say, Mr X puts in $1,000 in an NRE rupee fixed deposit for 36 months while Mr Y puts the same amount for the same tenure in an FCNR deposit. The money in the NRE account will be immediately converted at the prevailing market rate, say, Rs 35.80. In other words, Rs 35,800 will be put into Mr Xs account and will earn interest at an annual rate of 13.5 per cent (taking the Indian Bank rate as the benchmark). So, Mr X on maturity of the deposit will get a sum of Rs 51,792. On the other hand, Mr Y will earn interest at the annual rate of 6.25 per cent, so on maturity he gets $ 1,205.90, equivalent to Rs 43,171.22 at the same exchange rate.

This indicates that investing in an NRE deposit for a long-term of up to three years will be a more profitable option than investing it in FCNR but only as long as the Rs/$ rate does not touch Rs 42.95 by the time of maturity or Rs 40.05 for short-term investments of up to 12 months.Beyond these exch-ange rates, you will have to pay for the forex rate fluctuation and the balance will swing in favour of the FCNR deposit then.

In fact, banks say in the short and medium run it is profitable to convert into rupees as the interest rates are much higher. It is of course, an individual decision but with the likelihood of full convertibility coming in India in another three to four years, the rupee will strengthen. So, it might also be profitable to convert to rupee even for the long term.

Reinvestment scheme

After three years when the tenure of your NRI accounts approaches maturity, you can reinvest your money in the same bank. Some banks like Indian Bank, UTI Bank, Credit Lyonnais, Hong-kong Bank do this automatically at no extra cost. They simply intimate the customer.

Add-on benefits

All banks, foreign or nationalised, allow overdraft (OD) facility against FCNR, NRE or NRNR deposits. You can have the currency of your choice and your deposit continues to earn interest even if you withdraw the amount. To make things easier for you, the banks allow you to either pay the remittance from abroad in forex or from your rupee deposits in India. There is a standard rate of interest of 2.5 per cent above your deposit rate that you have to pay on the OD against NRNR, FCNR or NRE. For the latter accounts, the rate is applicable only if you repay in forex but if you repay in Indian rupees, you are char-ged the prevailing commercial lending rates.

HongKong Bank offers a further incentive for an NRE savings account holder. You get a global access ATM that works in 88 countries. You can with your ATM card withdraw up to Rs 16,000 per day and can transfer up to Rs 1,00,000 to any other branch of HongKong Bank in India. You can also remit funds to your account by a telex or a demand draft. Similarly, Deutsch-ebank allows NRE, NRNR or NRO account holders the dual benefit of a savings and a fixed deposit simultaneously, by linking these accounts to their Earnm%re account.

RFC account

If you are an NRI who wants to keep your funds in a freely convertible foreign currency after you return to India then you could go in for the RFC account. The only eligibility condition is that you should have lived outside India for a continuous period of one year and now are returning to stay permanently in India (at least for some time).

This account can be a savings, current or a term deposit and can be held singly or jointly. You need a minimum amount of $5,000 to start an RFC fixed deposit account and thereafter add in multiples of $ 1,000. The interest rates payable to the funds in such an account is decided by the respective banks on the basis of market rates, but the current prevailing rate is at three per cent.

These accounts have a nomination facility as in the case of resident rupee accounts and repatriation of the nominees share is permitted, if the nominee is an NRI. But no loans or overdrafts are granted against the balance in this account.

After opening the account if you become an NRI once again, the funds held in the account can be freely converted into the NRE/FCNR accounts or can be remitted abroad.

Tax benefits

Interest earned on NRE, NRNR or FCNR accounts is completely tax free while a tax of 30 per cent is levied at source on NRO accounts. Interest earned in an RFC account is exempt from taxation up to nine years. At the end of this period, if the person becomes an NRI again, the account can be renewed for another nine years or it gets converted to an NRO account and the interest is taxed accordingly.