Tax Planning Series IV – Investment Options for NRIs
Today Indians are reaching out to every corner of the world and are making their mark in their chosen field of business or profession. They are creating a lot of wealth for themselves and their family members. However, when it comes to investing their hard earned money, many of them prefer their motherland. The reasons can be two-fold. A sense of comfort factor to invest in the home country and secondly higher returns opportunities. In the first part of this article, we have covered various debt investment options available to NRIs. For the purpose of our definition, a Non Resident Indian (NRI) is a person resident outside India, who is a citizen of India or is a Person of Indian Origin (PIO). Presently, an NRI can earn a lot more on his fixed income investments in India compared to his country of residence (particularly if he is working in the developed world). Hence this makes a compelling argument for the NRI to invest his money in different debt instruments in India.
NRO Saving Account/NRE Saving Account: For money which is required to be parked for very short term, NRI can invest in NRO/NRE saving account. The account should be denominated in Indian Rupee and banks are free to determine the interest rates. This is just like the normal Savings Bank a/c maintained by Indian residents.
NRO/NRE Term Deposits: Deposits rates in India are very attractive as compared to developed world. For money that has to be invested for certain time period normally ranging from a year to 10 years, NRIs can look at investing in NRO/NRE Term deposits. With a view to provide greater flexibility to banks in mobilising non-resident deposits and also in view of prevailing account deficit situation of the country, RBI decided to deregulate interest rate on Non-Resident (External) Rupee (NRE) deposits wef December 16, 2011. Accordingly, today banks are free to determine the interest rates on term deposits of maturity of one year and above in both NRO/NRE a/c. However interest rates offered by banks on NRE and NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits. Presently, the State Bank of India (the largest bank in India) is offering 8.5% interest rate on both NRO and NRE deposit for 1 year to 10 years tenure.
The balances held in NRO account can be remitted back to foreign country but not exceeding USD one million per financial year, subject to payment of applicable taxes whereas balances held in the NRE account are freely repatriable. Apart from repatriable option, accrued interest income and balances held in NRE accounts is also exempt from Income tax and Wealth tax, respectively.
Currently NRE Deposit is a most sought after investment option. The high interest rate and the additional tax benefits as well as complete repatriable option, surely makes it a cut above other investments.
FCNR Deposits: An investor looking to deposit money in foreign currency, can look at investing in Foreign Currency Non Resident (Bank) Account (FCNR (B) A/C). Money in this can be deposited for 1 year to 5 years in currencies like US Dollar, Australian Dollar, Canadian dollar, Euro, Pound, and Japanese Yen. With effect from 23 November 2011, interest shall be paid within the ceiling rate of LIBOR/SWAP rates plus 125 basis points for the respective currency/corresponding maturities
Government Securities and Bonds: NRIs can invest without any limit in Government dated securities, Treasury bills, and Bonds as well as Tax-free bonds issued by public sector undertaking (PSU) inIndia (on a selective basis).
Non Convertible Debentures/Company Fixed Deposits: An NRI can also invest in Non-convertible debentures (NCDs) of a company incorporated in India as well as Perpetual debt instruments and debt capital instruments issued by banks in India on repatriation basis. One can also invest in various corporate fixed deposits of institutions like HDFC Ltd or other corporate houses on selective basis.
Domestic Debt Mutual Fund: An NRI can invest in a domestic debt mutual fund both from his NRO / NRE account. They can invest in all kind of income funds ranging from Liquid fund (very short term) to Income & Gilt funds which invests in government securities and corporate bonds. Moreover, there is no ceiling on the investment amount. Also the returns earned by them are taxed similar to a resident investor, except that the tax is deducted at source.
Traditional/Endowment Insurance Product: Traditional Endowment Insurance products are designed to provide lump sum money on the maturity of the policy or on unfortunate event of death of policy holder before the maturity. The typical tenure for this product is 10 years to 20 years and major portion of the investment in done in debt instruments. On maturity, investor can withdraw the full amount or convert the same in immediate annuity, where he get fixed sum of money every month/ year for certain time period or till death.
Where NRIs cannot invest: However an NRI is not allowed to invest in Post office small saving scheme, Public Provident Fund (PPF).