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.

 

 

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