All you Need to Know About NRI Fixed Deposit

A Non-Resident Indian (NRI) has many investment options in India. As an NRI, you can open a fixed deposit that has potential tax benefits. India is one of the few countries in the world that offers high returns on fixed investments like Fixed Deposits. Also, with India emerging as one of the fastest-developing economies, many NRIs have started preferring to invest in fixed-income instruments in India like fixed deposits. 

NRIs can open a fixed deposit with a bank, non-banking financial company (NBFC), and housing finance company (HFC). The interest rates can vary between these institutions.

Types of NRI Fixed Deposits

There are different types of NRI Fixed Deposits to choose from including:

• NRE FD – Non-Resident External or NRE Fixed Deposits allow NRIs to earn interest on their foreign earnings. These are fully-repatriable deposits. This means that you can transfer the principal and interest back to the country where you are currently residing. Also, the interest earned on an NRE Deposit is tax-free.
• NRO FD – Non-Resident Ordinary or NRO Fixed Deposits allow NRIs to earn interest on the income earned in India. These accounts can be opened jointly with a resident or non-resident Indians. The interest earned on these deposits is taxable in India.
• FCNR – Foreign Currency Non-Resident or FCNR Deposits allow NRIs to open and hold a fixed deposit in one of the permitted foreign currencies. These deposits are exempt from TDS in India. Also, the principal and interest are freely repatriable.

Points to note before opening an NRI Fixed Deposit

The Indian investment landscape is dynamic with the government announcing policy changes regularly to curb inflation and boost growth. Since you are not living in the country, it is important to understand the economic landscape of the country before opening an NRI Fixed Deposit. Here are some things that you must keep in mind:

Interest Rates

One of the first things that you must look for is the rate of interest offered on the FD. Remember, interest rates can be different depending on the type of fixed deposit you want to open (NRE, NRO, or FCNR), the investment amount, and the tenure of the FD. Also, there can be a difference in interest rates offered by banks, NBFCs, and HFCs. Hence, make sure that you look at the options available to you and compare interest rates before opening the FD.

Repatriation

It is important to remember that not all NRI FDs offer full repatriation of funds. While FCNR and NRE FDs are fully-repatriable, NRO Fixed Deposits have restricted repatriability. Some financial institutions can allow you to repatriate only a specific amount every year. Hence, make sure that you check the repatriation terms before signing the dotted line.

Taxes

While the interest earned on investments in India is usually subject to taxes, NRIs have the option of opening an NRE Fixed Deposit or an FCNR Fixed Deposit where the interest earned is not liable for tax. However, if you open an NRO Fixed Deposit, then the interest earned will be taxable in India.

In other words, if you are transferring funds earned overseas and opening an NRI fixed deposit in India, then you can get tax benefits. However, NRIs opening FDs for income earned in India will have to pay taxes.

Tenure of the FD

The duration of the FD will determine the interest rate offered by the financial institution. Hence, make sure that you look at the interest rate chart available on the websites of most banks, NBFCs, and HFCs and compare rates for the tenure for which you want to book the deposit. The minimum tenure for an NRE Fixed Deposit is one year.

DTAA Benefits

This is specifically applicable to NRO Fixed Deposits. These deposits can be opened using the income earned by NRIs in India. So, if you are an NRI but have a property that you rent out, then the rental income can be used to open an NRO FD. However, the interest earned on these deposits is subject to tax.

Many NRIs living in foreign countries have a source of income in India. In many cases, this income earned in India is subject to tax in India as well as the country of residence of the NRI. In other words, the NRI would be subject to double tax for income earned in India.

To avoid this, India has entered into a Double Tax Treaty Agreement with many countries. This ensures that NRIs don’t have to pay tax twice on the same income. If you are opening an NRO FD and living in a country that has a DTAA with India, then make sure that you offer a DTAA Declaration for every financial year.