The financial savings of local Indian residents and NRI’s are vastly different. For one, NRI’s will be earning in their local foreign currency. At the same time, they may or may not also be earning a small substantial amount from India through rent or dividends. Keeping these factors in mind, the government has set up a banking system that caters to the needs of these individuals. This is where the NRI bank deposits come into place.
The NRI deposit systems has been divided into two different accounts, namely the NRO and the NRE fixed deposits. They function similar to the local fixed deposits. These accounts offer a host of benefits such as repatriation, tax benefits, currency flexibility, etc. that make them the preferred choice for NRIs.
However, there is a considerable difference between the two deposits. They include:
Interest rate: In most cases, the investing bank will have different rates for each account. You will need to check the available rates, to know what the highest returns will be for you.
Taxation: When it comes to taxation of fixed deposits, the NRO is taxed. Any interest that is earned from an NRO FD is taxed, according to the Income Tax Act, 1961. This attracts around 30% of the income, which is comparatively high when compared to FD tax rates. On the other hand, the NRE fixed deposits do not attract any taxed on any income earned. This factor alone makes the NRE fixed deposits favourable over the NRO deposit.
Repatriation: NRO fixed deposits does not offer repatriation on the principal investment. In fact, the interest earned from this deposit can be transferred to a foreign account. NRE fixed deposits offer the option for full repatriation of funds, which includes both the principal and accrued interest to a foreign account. These accounts simplify the process of transferring funds earned from a local Indian account, making it a great deal.
Joint accounts: An NRI can opt for another NRI joint account holder, for the NRO or the NRE joint account. However, an NRI can only opt an NRO account jointly with an Indian resident. NRE fixed deposits cannot be opened with any Indian resident, even if the said individual is a member of one’s direct family.
Withdrawal and deposits: Only funds that have originated from India can be used to open and invested an NRO account and fixed deposit. This is not applicable for funds earned abroad. Funds from the NRE account be transferred into an NRO account for the purpose of opening a fixed deposit. However, funds from the NRO account cannot be transferred to the NRE account. Any withdrawals that have to be made from either account will need to be done only in INR currency.
The rate of interest in NRO and NRE accounts may vary according to the bank you are applying in. As such, it is imperative that you check the available rates to find the option with the highest returns for you. Typically, an NRE or NRO FD is offered with maturity between 1-20 years.