Indians staying abroad plan to make investments in India. However, when it comes to tax implications, they are clueless. Every investor should know the tax implications before investing money in any financial instrument. It helps them understand their actual or net returns. In this article, we discuss one of the least risk investment options for NRIs (Non-Resident Indians). We will also talk about the tax implications for such investments.
NRI stands for Non-Resident Indian. If you are an Indian citizen and live in a foreign country for more than one hundred and eighty-three (183) days in a financial year (FY) for work or business, you come under the NRI category.
NRI is different from PIO. PIO means Person of Indian Origin – an individual who is Indian by birth but lives abroad falls in this category. A person who has taken foreign citizenship can also be a PIO.
A fixed deposit is a savings scheme wherein you invest your money for a fixed period in return for a guaranteed fixed return. An NRE fixed deposit is a fixed deposit opened by NRI. An NRI can open an NRE fixed deposit in a single holding or joint holding format.
After returning to India, your NRI status will change to RNOR (Resident but not Ordinarily Resident) status. Your NRE deposits can remain as it is – you don’t need to do anything till maturity.
NRIs returning to India will have to go through different processes to transfer their assets and funds to the resident account from a foreign account. To help the NRIs in the process, the Reserve Bank of India allows the returning NRIs to open Resident Foreign Currency (RFC) accounts. The money in the RFC account is held as foreign currency. Hence, it is not open to the risk of foreign exchange fluctuation. Every NRI returning to India should open an RFC account for hassle-free transfer of assets.
A few features of NRE fixed deposits accounts are:
The NRE fixed deposit rates vary from bank to bank. The rates also vary as per the tenure of the fixed deposit. For example, Yes Bank offers 6.25% for one-year fixed deposits and 6.75% for five years and above duration. Other banks only offer around 5% for the same tenure.
At present, the NRE fixed deposits rates vary between 4.50% and 6.75% depending on the bank and the tenure.
2. Low minimum deposit account – You can open an NRE fixed deposits account for as low as Rs 25,000 with most banks (it can be different for different banks). It gives you the option to open multiple NRE FDs with small amounts.
3. Higher rates – The NRE FD interest rates offered by the banks are higher than a regular savings account. If you are sending money to India and keeping the amount in a savings account, it is always better to open NRE FD and earn more interest.
4. Hassle-free renewal – If you invest for the long term, you don’t have to worry about the documentation or form submission to renew your NRE fixed deposits. Your principal and interest are auto-renewed on maturity.
5. Competitive exchange rate – As mentioned above, you can convert any currency to INR and open an NRE fixed deposit accounts. The rates offered by the banks for conversion are one of the best in the market.
6. Flexibility – You have to deposit money in the Indian currency, but most banks accept any currency for conversion. It means you don’t have to go through the conversion process. You can fund your account with any convertible currency and open an NRE fixed deposit account.
7. Tax benefits – The interest you earn on your deposits is not taxable in India.
8. Loan options – Most banks give you attractive loan options on NRE fixed deposits accounts. You can get a loan of up to 90% of your deposits at attractive interest rates.
Indian who are staying outside India continue to invest in India for a number of reasons. India is an emerging market, and the potential growth is better than other countries.
NRIs invest in India, but the calculations get complicated when they return to India. Every NRI needs to do tax planning before returning to India. It will help them in ways they may not be aware of today. For example, the majority of NRIs are not aware of the benefits of filing taxes when they return to India. It helps them claim a refund, or in case they have losses, they can carry forward it for future years.
Right Horizons has years of experience in doing tax planning for NRIs. Tax planning is a bit complicated for NRIs, and Right Horizons’ goal is to make it simple for every NRI. Whether you want to reduce your tax liability or you have queries related to property taxation, Right Horizons helps you at every step for every category.
Right Horizons not only help its client with the investment but also with efficient tax planning services. NRI Taxation is one of the core areas of expertise for Right Horizons with Advance and Capital Gain Taxation.
Different financial instruments are taxed differently for NRIs in India. Though NRE FDs are tax-free, other investment options are taxed. NRIs should check the tax implication before making an investment.
No, interest earned from the interest in NRE fixed deposits is exempt from tax in India.
As long as you are NRI, the interest earned by you on the NRE FD is exempt from tax. However, if you have returned to India, you should inform the bank about your NRE account and make a request to re-designate your account as a resident foreign currency (RFC) account. It is important to note that the RFC account bears a lower interest rate than NRE FDs. Once this process is complete, the interest you earn on your NRE fixed deposits will be taxable.
The first step is to determine the right of residence every financial year. Once you have it, you need to go through the tax filing process. Things to consider while filing tax – choose the right ITR form, check the compensation against double taxation treaties, etc.
Once you return to India, you become an Indian resident. You can no longer maintain an NRI bank account or avail the benefits NRIs get on investment in India. Hence, convert or re-designator close your NRE account within three months of your return. Your fixed deposits can remain as it is till maturity.
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