As of September 2015, the total sum of money deposited across India stood at $121.8 Billion, witnessing an increase of almost $10 Billion than the previous fiscal year. The growth is attested to comparatively higher rates of interest and the widening gap in the value of rupee amongst developed economies and India.
Although, once a resident is termed as an NRI, their right to having regular savings account in any Indian financial institute is abrogated by law. The determination of transition in residential status from a regular citizen to a Non-residential Indian is under the purview of Foreign Exchange Management Act (FEMA). They use the intent of a resident as a determinant to change the residential status.
Thereby, an NRI who wills to open an NRI account to park their funds in India has two options – Non-residential Ordinary (NRO) Account and Non-residential External (NRE) account.
Types of NRI accounts
- Non-Residential Ordinary account – This account facilitates an individual to park his/her income earned within the geographical boundaries of India. It can be either from their earlier income while they were in India, from leasing their existing property, or from investments.
- Non-Residential External account – In case of an NRE account, an NRI individual can only deposit income earned outside of the geographical boundaries of India. However, both the accounts accept deposits in INR only.
Investment options for NRIs
NRIs are eligible to invest in India with the use of the aforementioned NRI accounts. Regardless, as NRE accounts are strictly used for parking foreign currency, NRIs can only utilise the NRO account to receive income from their investments.
You can invest in a variety of investment options. Some of these investment options are listed below for you to consider –
- Fixed Deposits – Fixed deposit is one of the most conventional methods of investment, opted by many individuals, NRIs and regular citizens alike. It is because fixed deposits are market independent, and its profitability does not vary with fluctuations in the market. At the same time, you can earn a steady rate of interest on such investments. Fund accumulation, in this case, is considerable.
You can assess your FD amount at maturity by using an FD calculator. Additionally, unlike market-linked instruments, there is no possibility of losing your investment or suffering any loss; which is why conservative investment approach is better.
- Recurring Deposits – In case of recurring deposits, you need to deposit periodically in your NRO account. As this investment cannot occur directly from your end, you can either utilise the income you receive as rent on your leased property or decide to invest through an NRE account. The interest earned on recurring deposits is comparatively lower than fixed deposits.
- Stocks – You can also utilise your savings in an NRO account to invest in the share market. Equity shares are market-linked financial instruments and respond extensively to market fluctuations. Capital gains or dividends earned on shares are, therefore, subject to highest risk. However, because of the higher risks involved, in a debate of fixed deposit vs. equity shares, which is better, the conclusion varies from investor to investor.
Interest rates on fixed deposits and tax implications
NRIs need to have a minimum of Rs. 25,000 to open a fixed deposit account in India through their NRI account.
The interest rates vary according to the type of FD account and the tenor you have chosen for your account. Primarily, financial institutions like Bajaj Finance offer two types of Fixed Deposit accounts – cumulative and non-cumulative. An approximation of the standard interest rates offered by financial institutions are provided below –
- For a tenor of 12 – 24 months, cumulative FD accounts earn up to 8% p.a. and non-cumulative accounts attract up to 7.72% monthly, 7.77% quarterly, 7.8% semi-annually, and 8% annually.
- For a tenor of 24 – 35 months, cumulative accounts attract up to 8.05% per annum and non-cumulative accounts earn up to 7.77%, 7.82%, 7.89%, and 8.05% respectively.
- For a tenor of 36 months, cumulative FDs earn up to 8.35% and non-cumulative accounts attract up to 8.05%, 8.1%, 8.18%, and 8.35% respectively.
In the case of taxation, how interest earned on a fixed deposit is taxed is discussed below –
- According to the Income Tax (IT) department, the principal and interest earned on FD by an NRI are exempt from taxation.
- TDS is applicable on the same at the rate of 30%.
Under recent economic conditions, India has become a lucrative location for NRIs to invest in owing to the disparity in the exchange rate between developed and Indian economy.
Gaurav Khanna is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends. Check out his blog at HighlightStory