Multiple banks in India have started to offer interest on NRE fixed deposits – as high as 9.6% p.a. In order to appreciate this deal better, you first need to understand who can take advantage of this deal and what does NRE stands for. Basically for Non Resident Indians (NRI) there are three types of bank accounts which can be opened in India – NRE, NRO & FCNR. You can read in detail on these three accounts on our website https://banyanfa.com/banyanfa/nri/bank_account.html.
Income Tax Act in India allows all interest from NRE bank account as TAX FREE. Contrary to this, interest from NRO account attracts flat tax deduction at the rate of approx 30%. So now you can appreciate that Tax Free interest for NRIs would be an attractive deal. To make it more attractive, let me give a brief history around NRE fixed deposit interest rates.
I believe NRE fixed deposit were one of the lowest interest paid deposits within India for a simple reason – the interest on such deposits was tax free. Banks hence never thought about increasing the interest rates beyond 3-4% p.a. So if you had booked a FD for Rs. 10 lacs, you would have not got more than Rs. 40,000 per year. Possibly, the banks were always aware that even if the NRIs went for NRO fixed deposit which offered much higher rates of interest, the after tax yields would be a bit higher than NRE interest rates. Further the added benefit of free repatriation of NRE deposit and its associated interest income further added to the bank’s incentive to keep NRE interest rates down to less than 4%.
Why are NRE Interest Rates at 9% plus now?
I must call it that if the banks could prevent, they would have definitely kept the interest on NRE fixed deposits where they always used to be. However, a combination of multiple factors forced the banks to increase the NRE interest rates to 9%. These factors are:
1. The primary reason is Life time high Foreign Exchange rate (USD / INR at 53.5 Rs.). It prompted Reserve Bank of India attract NRI remittances to tame the rising rupee. Increasing NRE deposit interest rates to over 9% would attract a lot of foreign currency into India which would in turn increase the supply of foreign currency in India and hence reduce the exchange rates.
2. High Inflation and interest rate scenario prevailing the economy influenced the high NRE deposit rates.
Is it Really good opportunity to invest in NRE FDs ?
In our opinion, this is an excellent opportunity to give a good run to your money. Money creates money. Investing your funds into NRE fixed deposits would provide you an opportunity to gain a good return in the current volatile economic situation. Even resident Indians don’t have this opportunity. For resident indians, any interest income on fixed deposits over Rs. 5,000 from a bank is liable to an upfront 10% tax deduction (TDS) and is residual is also subject to tax. NRE fixed deposits would not be subject to TDS and entire FD interest would be released to NRIs as tax free income in India.
Interest Offered by Different Banks
Different banks are offering variable interest rates. As an illustration, we have noted a few options available from the leading banks in India (at January 2016):
|Upto 3 years||More than 5 years|
|State Bank of India||7.50||7.00|
|Axis Bank (greater than 15 lacs)||7.75||7.5|
|You can visit the respective bank’s website to find their latest and detailed rate charts.|
State Bank of India http://www.sbi.co.in/portal/web/interest-rates/nre-fixed-deposits
ICICI Bank http://www.icicibank.com/nri-banking/RHStemp/rates.page?
Kotak Mahindra Bank http://nri.kotak.com/Kotak_BankSite/nri/interest-rates.html
Axis Bank http://www.axisbank.com/download/Interest-Rates-on-NRI-Deposits.pdf
How to Invest
Best way to capitalise upon the NRE tax free fixed deposit is to lock in for a long term in these deposits. 10 years is a good time frame to go for with these fixed deposits. We would advise you to go for SBI or any equivalent bank which is currently offering 9.25% plus for a 10 year deposit. There are multiple options to go for:
1. Invest in 10 years FD with cumulative option for interest payout. This would provide principal plus interest accrued there on at maturity.
2. Invest in 10 years FD with a quarterly interest payout. Invest the subsequent interest payouts into a monthly SIP of a mutual fund. This would safeguard your initial principal amount. Only the interest payout would be invested into an equity oriented mutual fund. The investment into SIP would give an equity market kick to your returns. 10 years SIP out of interest payout is a healthy period to provide an opportunity for equity SIPs to grow. I would not be surprised if by end of 10 years your initial deposit plus the value of the associated SIPs touches 4-6 times of your initial investment. In essence it would be a capital protection scheme which you can create by investing the interest into Equity SIPs. We specialise in creating such products for our client and if you need any assistance or guidance, please free to contact us via our website (https://banyanfa.com/banyanfa/contactus.asp). You can find more about how SIPs can create value for you by visiting our blog note on How SIPs Work
3. You must take care while booking your fixed deposits. Since these are long term fixed deposits, there is a likelihood whereby you may need to use fixed deposit funds. Please refer to our blog note on Fixed Deposits – How to Benefit the Most Out of them where we have explained multiple options which you can use while opening fixed deposits.
This blog reflects the opinions of Banyan Financial Advisors. You can contact us on www.banyanfa.com.