Just like resident Indians have the option of investing through fixed deposits, even NRIs have the option to open an NRE Fixed Deposit account overseas. NRE accounts carry several benefits for the NRI account holders, especially regarding full and free repatriability of funds. When such accounts are opened as term deposit accounts, such deposits are called NRE Fixed Deposits (FDs).
Here are salient features of NRE FDs:
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- Funding for NRE FDs – Such deposits can be funded through inward overseas remittances or transfer from NRE account or FCNR deposits. NRE FDs cannot be funded through any regular savings bank account in India or an NRO account.
- Denominated in Indian Currency – NRE deposits are denominated in Indian rupees. If the funding for such deposits has been done through foreign currency remittance, the amount is converted into equivalent Indian currency at the prevailing exchange rates. As such, the deposit account remains free from any exchange risk and is not impacted by any currency rate movements.
- Full and Free Repatriability of Funds – Such NRE FDs offer full and free repatriability of the account balances. As such, the NRI can transfer the maturity proceeds of NRE FDs outside India without any restrictions. It does not make a difference if the maturity proceeds have been received after completion of the deposit period or after premature withdrawal of such FDs.
- Interest Rates on NRE FDs – The Reserve Bank of India (RBI) has deregulated the interest rates of NRE deposits, and the banks are free to set interest rates on NRE deposits. One can take advantage of the attractive interest rates on such deposits.
- Premature Withdrawal – NRE FDs can be opened for a minimum tenor of one year. Such FDs can be withdrawn prematurely before completing the contracted tenor, subject to a premature withdrawal penalty. However, if such FD is withdrawn prematurely within one year of the investment, the bank can pay no interest under the RBI Regulations.
- Tax Exemption on Interest Income – As per the prevailing tax laws, the interest income on NRE FDs is exempt from Indian income tax. As such, the attractive interest rates on NRE FDs become more attractive when compared with other taxable investment options for the NRIs. Being exempt from Income tax, the NRI account holder is relieved of income tax compliances, including ITR filing and tax payments, if interest income from NRE FDs is their only income.
- Change of Residential Status – If an NRI has opened an NRE fixed deposit and subsequently, the residential status of such individuals changes from NRI to resident Indian, one can continue holding such NRE FD till its contractual maturity. Post such maturity period; one can convert such balance into RFC (Resident Foreign Currency) account and continue to enjoy the free repatriability of such funds in future.
As such, NRE FDs find their utility and relevance for their full and free repatriatibility of funds and tax exemption on the interest income. NRIs can use NRE FDs to park their savings and investments in India without worrying about tax compliances.
The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules, as tax benefits are subject to changes due to change in tax laws.
