NRI FD Rates: Strategies for NRIs to Maximise Returns with Higher FD Rates

November 21, 2024

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In an online forum, a person, who claimed to be an NRI asked, why invest in an NRO Account when you already have an NRE Accounts? His bone of contention was that the interest earned on NRO Accounts is taxable, whereas NRE Accounts allow tax-free repatriation. Both the Accounts are designed to serve different purposes. In simple words, NRE Accounts allow NRIs to park their overseas income in India while NRO Accounts are meant for NRIs seeking to manage earnings generated in India. But then there are certain rules and regulations.

That said, today we will talk about how NRIs can capitalise on their FDs to maximise returns. But before diving in, here’s an interesting fact that on NRI Account. As per FEMA (Foreign Exchange Management) Act, once an individual is recognised as an NRI, the individual must convert their Indian Accounts to NRI Accounts or close their existing accounts. It’s a mandatory rule.

A Word on NRI Fixed Deposits

There's a reason why we started this blog with a reference to a random discussion that happened on a forum some time ago. That's because there's still a lot of confusion regarding NRI Accounts and their purposes. That said, our goal is to simplify finance for you. So, here's a short recap on different NRI FDs and their functionalities.

1. Non-Resident External (NRE) FD

Purpose: For NRIs looking to invest foreign income in India
Repatriation Benefits: Principal and interest are fully repatriable
Tax Implications: Interest earned is not taxable in India
Deposit Tenure: Tenure typically ranges from 1 to 10 years

2. Non-Resident Ordinary (NRO) FD

Purpose: For NRIs looking to invest income earned in India
Repatriation: Restricted up to USD 1 million
Tax Implications: Interest earned is taxable in India as per the Income Tax Act, 1961
Deposit Tenure: Tenure typically ranges from 7 days to 10 years

Now, let's understand how to maximise your NRI FD returns.

Strategies to Maximise Returns with High NRI FD Rates

1. NRI FD Rates

NRI FD interest rates vary across banks. Generally, Small Finance Banks offer higher NRI FD rates compared to traditional banks. It's essential to do exhaustive research before opening a particular account. Use an NRI Fixed Deposit ROI Calculator to compare returns and invest accordingly.

2. Know Your Purpose

We have discussed how NRE and NRO FDs vary based on the purpose they serve. If you're clear on your investment purpose, it will be much easier to make the best out of your FD returns.

3. Diversify

There's no prohibition for NRIs to open and maintain multiple NRI FD Accounts. You may consider spreading out your NRI FD investments across maturity periods. This could help in managing interest rate risk while providing liquidity at regular intervals as each FD matures.

4. Understanding Taxation

NRE FDs are exempt from tax. However, interest earned on NRO FDs is subject to tax as per Income Tax laws in India. As of July 2024, the TDS (Tax Deducted at Source) on interest earned on NRO deposits is 30% plus Cess and surcharge. That said, you can reduce the tax burden under DTAA (Double Taxation Avoidance Agreement) provisions. It's basically a bilateral agreement between India and other 90+ countries to promote cross-border trade and investment by providing greater tax certainty and reducing tax burden for NRIs. The agreement aims to help citizens to avoid situations where the same income is taxed in both - the country of residence and source country.

5. Deposit Tenure

Banks offer different interest rates for different FD deposit tenures. You can capitalise on this by selecting a tenure that's aligned to your investment goals. Our tip would be don't just book an FD on the basis of interest rates. A short-term FD may offer higher interest rates, but staying invested for the long-term may give you better returns; thanks to the power of compounding. That said, consult an investment adviser before making any investment decisions so that you're on track with your financial goals.

Final Thoughts

To maximise your returns with NRI FD rates, it is crucial to set clear financial goals, consider liquidity needs, diversify investments, compare interest rates. You may consider implementing these strategies to earn better returns on your savings.

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FAQs

1. Can NRIs open a joint fixed deposit account with Indians?

As per FEMA regulations, NRIs can open a joint NRE/NRO Account with another NRI or resident Indian. In case the joint account holder is a Resident Indian, as per RBI guidelines, the resident Indian needs to be a close relative of the primary account holder the mode of operation shall be "Former or Survivor (FOR)". The joint account holder can only operate the account in the event of demise of the primary account holder.

As per Section 6 (Schedule IA) Companies Act, 1956, father, mother (including step-mother), son (including step-son), son’s wife, daughter (including step-daughter), father’s father, father’s mother, son’s daughter, son’s wife, son’s son, mother’s mother, mother’s father, son’s daughter’s husband, daughter’s husband, daughter’s son, daughter’s son’s wife, daughter’s daughter, brother, brother’s wife, sister and sister’s husband can be deemed as close relatives.

2. Are NRI FD rates fixed or variable?

The NRI FD rates are generally fixed for the entire tenure of the deposit.

3. Can NRIs reinvest the maturity amount of their fixed deposit?

Yes, NRIs can reinvest the maturity amount of their fixed deposit in another fixed deposit or other investment options.

4. Are NRI FDs rates higher than those on NRI Savings Accounts?

Yes, NRI FD rates are generally higher than Savings Accounts, making them an attractive investment option for NRIs. However, unlike resident FDs, in most cases, banks don't offer additional interest rate for senior citizens for NRI FDs.

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