How do NRE accounts work and how safe are they?

by Manshu on June 12, 2012

in Economy

Ajay posted a comment about the safety of NRE accounts, and how they work yesterday, and with the exchange rate where it is – NRE accounts are attracting investors once again.

I have answered preliminary questions about the NRE account in the following three posts and in this one I will answer the question about their safety and mechanics.

NRO Account versus NRE Account

How to open NRO / NRE account when you’re abroad?

Best Bank NRE Rates

How does a NRE account work?

After you open a NRE account, you transfer money in your local currency like the USD, EUR or AUD and the bank uses the current exchange rate to convert that to Indian Rupees and then open a fixed deposit with it.

The NRE account is the closest to a fixed deposit in structure, you put some money in it for a specified tenure for a specified rate, and the bank pays you interest periodically. You can choose how you want the interest to be paid.

This is simple enough, and the only thing to keep in mind here is that the bank doesn’t guarantee an exchange rate to you. The money will convert at the rate that’s current at that time, and when the NRE deposit matures, and you want to withdraw the money, the bank will give you the rate that exists at that time.

This can work both ways and give you extra gains or even a loss. If the Rupee depreciates significantly from the time of your deposit to the time of withdrawal then you will make a loss, and if the Rupee appreciates then that will be a bonus over and above whatever the interest rate was.

Of course, if you don’t convert the money from Rupees then you don’t have to worry about the exchange rate, and that is what a lot of NRIs are using these deposits for as well.

Tax on NRE Deposits

There is no tax in India for NRE deposits but the rules are different in different countries. According to US rules, a resident needs to declare income and pay tax regardless of where they earn it. Other countries don’t have these kind of requirements, and unfortunately I’m not familiar with the details of this aspect so I won’t be able to elaborate more.

Safety of NRE Deposits

Since a lot of large PSU and private banks offer these deposits, it is hard to see a risk of default. Bank failures are rare in India, and to that extent the deposits are quite safe from default and even the interest payment is safe unless something really extra ordinary happens.

I believe I’ve covered most the questions that you will have when you are about ready to start a NRE deposit but please do leave any other comments you may have and I’ll answer them to the best of my knowledge.

 

 

{ 10 comments… read them below or add one }

PP June 12, 2012 at 10:56 am

A lot of my friends in US are concerned about how they will be taxed on the returns from their investments in India, if they repatriate it back to US.

Reply

Manshu June 12, 2012 at 4:49 pm

As far as the US is concerned, any income outside the country is also taxable, and I think not only at the time of repatriation, you have to declare it as you earn it. I’m not well versed with those rules so can’t explain in detail but it is taxable as far as I know.

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PP June 24, 2012 at 6:14 pm

Right, I think you become “Resident” for tax purposes after 5 years of stay in US even if you are on a non-immigrant visa and then you are supposed to declare your global income.

I recently read an article in ET saying that if an NRI staying in US invests in equity/MF in India, he being a US person, the source of his/her income on this investment will be considered as US, and will be taxable in US. Thus, if the capital gains are short term, he/she might get taxed in both countries, and in case of long term gains, income will be taxable in US even if it is tax free in India. Interestingly, however, this doesn’t apply to real estate.

I’m sure this must be a topic of great interest for your readers in US.

Reply

Manshu June 25, 2012 at 5:12 pm

Yes that is true PP – I need to write a lot more posts about things that affect NRIs, that’s one section that’s pretty low on content on the site.

Reply

Sridhar June 12, 2012 at 2:55 pm

Hi Manshu,
What is the interest rate offered on these NRE deposits? How does this compare with rates offered by banks in US or other countries?
What about the liquidity? Can the account holder withdraw the money any time or will there be any penalty for early withdrawals. I am sure most NRIs will have these queries.

Reply

Manshu June 12, 2012 at 4:58 pm

Hi Sridhar,

Good points.

1. The interest rate on these is around the 9% mark which is a lot higher when compared with countries like the US where the interest rates are virtually zero. That’s the main reason why NRIs are interested in getting a deposit in India even though the exchange rate loss can wipe out any gain that they have.

2. They can pretty much break the NRE FD like the other FD and they will get the lower interest of that time period. I don’t know if all banks have penalties or not but you can find one that does not have.

Reply

Shashank June 14, 2012 at 11:28 pm

One more thing to add here : We also have facility of cheque-book facility on NRE accounts.

Reply

Raja June 27, 2012 at 5:48 pm

“This is simple enough, and the only thing to keep in mind here is that the bank doesn’t guarantee an exchange rate to you. The money will convert at the rate that’s current at that time, and when the NRE deposit matures, and you want to withdraw the money, the bank will give you the rate that exists at that time.”

But this problem comes into question only when you want to repatriate the amount back to your origin country, right ?
In cases when you are planning to come back to India, and are ok to withdraw the money in rupees, this problem doesn’t arise. isn’t it ?

Regards
Raja

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Manshu July 1, 2012 at 8:58 pm

Yes Raja – you are spot on.

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dilip July 29, 2012 at 9:03 pm

I am retiring from Central Government Service next year. There will be good amount of savings by way of retirement benefit and General Provident Fund by that time. And I will be migrating to USA immediately thereafter to join my family there. I want to repatriate the amount over to USA. What is best way out?

I will continue to get pension every month. Can I repatriate that also?

Reply

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