Are NRE FDs better than FMPs for NRIs?

by Manshu on October 7, 2012

in NRI

In a prior post I compared FMPs (Fixed Maturity Plans) with bank fixed deposits, and said that if you are in the higher tax bracket, the tax advantage of FMPs tilt the balance in their favor somewhat (if you can live with the uncertainty).

That’s true for domestic investors but what about NRIs?

Allwyn left the following comment on the Suggest a Topic page a few days ago:

allwyn September 4, 2012 at 12:59 am [edit]

Hi,
Could you pls. explain the advantages/disadvantages of FDs(presently int. rates of over 9% tax free) over FMP/Debt funds for NRI’s

Thanks in advance

Allwyn

This is an interesting question, and in my mind since it’s only the tax advantage that makes you think of FMPs over fixed deposits for domestic investors, you need to look at the tax angle to answer this question for NRIs as well.

For close to a year now, NRE fixed deposits are tax free, and this was one step by RBI to arrest the Rupee slide. This means that NRE fixed deposits are currently better than NRO fixed deposits, and they are an obvious competitor to NRI investments in FMPs.

I didn’t know how FMPs are taxed for NRIs but this DSP BLACKROCK page on NRI taxation states that NRIs will be taxed at their applicable assessee rate in case of short term capital gains, and will be taxed at 10% without indexation or 20% with indexation for long term capital gains on non – equity mutual funds.

Since most FMPs are slightly over a year to make them count under long term capital gains, this means that most of the time your NRI FMPs will taxed at 10% whereas the returns from your NRE fixed deposits are tax free.

I think in general it is easier to open a NRE fixed deposit than it is to buy a FMP for NRIs, so that’s another thing in their favor along with the fact that you know before hand how much your fixed deposit will earn.

If the tax situation for NRIs change as far as FMPs are concerned then this might be worth a re-look but until then I can’t think of a good reason to favor FMPs instead of FDs for NRIs.

This post was from the Suggest a Topic page.

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{ 4 comments… read them below or add one }

Income Tax For NRI October 23, 2012 at 2:30 pm

“I am plannning to move back to India beginning of next year after my stint in US. I have the following queries:
1) Can you please tell me if I have to pay tax on my US earnings once I transfer them to India.
2) Is it true that NRIs have to pay wealth tax on the money they bring back?
3) Is it possible to retain my savings in NRE FDs in US dollars rather than converting then to Rupees?”

Reply

srini October 26, 2012 at 3:17 am

Here are my thoughts..
1. I don’t think so. but transfer as much money as possible when you are in NRI status.. Remember that don’t transfer more than $6k in one transaction as it might trigger IRS suspension.
2.I think you have 2 years to transfer your money to India. Since you will be in resident status you will have to pay Indian income tax ( which is more than US tax) but double taxation will kick in..so you may get some of your taxes back from IRS.
3. NRE is a rupee account so you will need to convert into rupees . but if you want to keep $ , the RESIDENT FOREIGN CURRENCY account is the one you should look..just remember interest rates on that are around 2.5 per year. and i think you may have to pay taxes on interest..

your best bet may be open 2 ppfs on your name and your spouse name (1l each) ..get tax benefits as RI. that means you can have (30l+30l) in fixed deposits without any issues..30l@ 9 will give you 22500 per month ( up to 2 lacks there is no tax and can cliam 1l tax benefit under ppf)..other than this i dont really see any good otpion to reduce your tax…

regards

Reply

mintluver March 15, 2013 at 9:18 pm

Hello Manshu,
Thank you for your valuable inputs
Can you please write an article or clarify how taxation works in India for life insurance claim payment received in foreign country(say in USA) and same amount needs to be brought to India.

Reply

Prakash September 27, 2013 at 4:37 pm

Hi,
Is thre any ETF for Urenuium?

Reply

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