Premature Withdrawal Restrictions On New FCNR Dollar Deposits
Fixed income in India has become an extremely attractive proposition for NRIs investing in India, thanks to the high interest rate regime.
And for NRIs in the US, it's a double whammy. Sanjeev Sardana, CEO of California based wealth advisory firm Bluepointe Capital explains, "The rupee has, in the past few weeks, depreciated significantly against the dollar. Secondly, interest rates on bank deposits in India have become extremely attractive. These two factors together make investing in fixed income in India extremely attractive right now."
State Bank of India for instance is offering a whopping 9.25% interest on NRO deposits of 1 year or more. Even assuming a tax rate of 30%, this gives a post tax return of 6.5%.
The rupee too is currently at Rs 49 to a dollar.
But before you jump at the opportunity, there are a few things you should know.
Firstly, there will be a certain degree of currency risk. While the immediate outlook on the rupee continues to remain bleak, at least till the clouds lift on the Euro Zone crisis, the situation is very volatile.
Explains Sandeep Shanbhag, Director of Wonderland investments and an expert in NRI financial matters, "Right now, the dollar is at Rs 49. But if the dollar rises to say Rs 55 at the time of maturity of your investment, your gains from the high interest rate would be wiped out if you repatriate your money abroad."
Sardana too adds, "How much you invest in fixed income instruments in India will really depend on your need for income and how much currency risk you can take."
Fixed Income Options
There are a number of options available for NRIs to invest in fixed income in India. However, not all offer high returns. The FCNR and NRE fixed deposit accounts for instance offer interest rate of 1.5-2.5% per annum; this interest is tax free. The options that offer high returns are given below:
NRO fixed deposits: Most banks are now offering interest rates of over 9% on these deposits. Here are some of the things to keep in mind:
You can transfer money into the NRO fixed deposit account directly from abroad in a freely convertible foreign currency or issue cheques drawn on your foreign currency account abroad. Alternately, you can transfer money from an existing NRE, FCNR or NRO savings account in India or deposit travelers' cheques on your visit to India. Having said that, each bank will have its own policy on this and you would have to check what credits your bank accepts.
As per current tax regulations, tax would be deducted at source at the rate of 30.9% from the interest. If you live in a country that has a Double Taxation Avoidance Agreement (DTAA) with India, the TDS rate would be 15%, but you would need to submit a tax residency certificate to the bank
Interest would be paid every quarter and will usually be credited to the NRO savings account. On maturity too the proceeds are credited to the NRO savings account. Now the repatriation can be a bit cumbersome. "As per the law, the interest earned on this account is freely repatriable outside India. Even the portion of investment made using foreign funds is supposed to be freely repatriable. But practically it does not happen. To keep things simple, banks prefer to credit the interest as well as maturity proceeds of the NRO fixed deposit to the NRO savings account, irrespective of source of funds.
You will then be allowed to repatriate a total of USD 1 million per calendar year subject to submitting a CA certificate and an undertaking to the bank. This limit includes funds received on other capital account transactions such as sale of property or investments," Shanbhag explains.
Debt mutual funds:
Debt mutual funds are an option for NRIs in countries other than the US and Canada. Due to certain restrictions of the US Securities Exchange Commission, NRIs in the US may find it difficult to invest in mutual funds in India. For the others, here are some guidelines:
Short term floating rate funds and liquid funds are good bets in a rising interest rate scenario. Returns of some of the top performers in these categories during the last year have been in the range of 8-9%.
You can make the investment by remittance through normal banking channels, or by debit to your NRO, NRE or FCNR account.
In the case of mutual funds repatriation is a bit different. Shanbhag explains, "If you have made the investment through foreign funds or NRE/ FCNR accounts, the fund house will credit your dividends/ interest and principle to your NRE savings account. The balance in the NRE savings account can be freely repatriated without any limit.
MUMBAI: The Reserve Bank today allowed repayment of loans by resident citizens, which they have taken from their non-resident relatives, to the NRE or foreign currency non-resident (bank) accounts.
"It has been decided that... banks may allow repayment of loans to NRE/foreign currency non-resident (bank) [FCNR(B)] account of the lender concerned subject to the condition that the loan to the resident individual was extended by way of inward remittances in foreign exchange through normal banking channels," an RBI circular said here.
In a bid to attract dollars into the country and arrest the fall of the rupee, the Reserve Bank of India recently facilitated a swap deal on Foreign Currency Non Resident (FCNR) dollar deposits. According to the deal, banks that bring in FCNR deposits for a tenure of over 3 years will be able to avail of a forward rate at a premium of 3.5% as against the current market rate of 7%. As a result, banks have started to heavily market FCNR deposits to Non Resident Indians (NRIs).
FCNR deposits do offer a lot of advantages to NRIs. It is a term deposit account that can be maintained byNRIs and PIOs in foreign currency and can be a good option for NRIs looking to invest in India without worrying about currency risks.
The interest rates vary between tenures and from currency to currency. Rates may also vary between banks. But today, thanks to the swap deal, banks are offering FCNR deposits at an interest rate of over 5% on dollar deposits over 3 years. Moreover, this interest is tax free in India. Balances in FCNR can be freely repatriated outside India.
Restrictions on premature withdrawal
However, there is one catch that NRIs need to be aware of. Since RBI's swap deal is available to banks on FCNR deposits over 3 years, banks are restricting partial or premature withdrawal on FCNR deposits opened for a term of 3 years and above. While premature withdrawal penalty is a regular feature of FCNR (B) deposits, banks today are levying higher penalties or completely disallowing premature withdrawal on newly opened FCNR (B) deposits of 3-year terms and above.
"It's important that full disclosure is made pro-actively and the consumer enters into the contract knowingly. At least in this particular case banks are more than pro-active in terms of specifying the pre-mature withdrawal penalty wherever applicable," says Harsh Roongta, CEO of ApnaPaisa.com.
Each bank has its own approach. According to the website of ICICI Bank, 'with effect from October 1, 2013, partial or premature withdrawals for all new and renewed FCNR (B) Deposits opened with a tenure of 3 years and above, is not permitted.'
Kotak Bank in turn has a higher penalty for premature withdrawal. For FCNR deposits over 3 years, no premature withdrawal will be allowed during the first year and the deposit will be locked for that term. Subsequently, if a premature withdrawal needs to be made, it will be subject to a penalty. According to the bank website, 'the penalty will be computed at 7.5 percent per annum plus the prevailing USD/INR swap rate in the market for the residual tenor of the original deposit, applied over the period for which the deposit is held. The Customer shall not challenge the calculation of penalty done by KMBL and such calculation shall be final and binding on the customer.'
State Bank of India has separate products - a regular FCNR (B) deposits and a special FCNR (B) deposit. The special FCNR (B) deposit does not allow premature withdrawal on deposits over 3 years but also offers a higher rate of interest.
Among foreign banks too, there are restrictions on premature withdrawal. While Standard Chartered BankIndia allows premature withdrawal on 3 year deposits, the penalty is variable. According to the bank website, 'the Bank shall recover penalty from the Depositor for all amounts equal to the total losses or costs incurred by the Bank (including, without limitation, any loss or cost incurred as a result of the Bank terminating, liquidating, obtaining or re-establishing any hedge or related position in connection with this Deposit) that are or would be incurred under then prevailing circumstances. The Bank shall be entitled to set-off such losses and costs incurred by the Bank against the Deposit and interest payable thereon.'
NEW DELHI: Come April 2013 and your old cheque books from your bank account in India will become void. The Reserve Bank of India (RBI) has introduced a new format forcheques, the CTS-2010 Standard as part of its measures for standardization and enhancement of security features.
"If the cheques are not compliant with the new CTS 2010 standards by March 31st 2013, they may be considered invalid and may not be honored post the deadline or may be cleared at a less frequent interval as per RBI directive. Going forward all customers will need to be careful while writing the new cheques. For instance, cheques with alterations in crucial fields like payee's name and amount in figures or words will not be processed under the new system post the March 31st 2013 deadline. It also becomes imperative that if one has availed a home loan and/ or auto loan and issued post-dated cheques, then they will be required to replace such post-dated cheques with the CTS-2010 compliant ones now before March 31, 2013," explains Virat Diwanji, Executive Vice President and Head Branch Banking, Kotak Mahindra Bank.
"Visibly there would be 4-5 key differences between the old cheques and new CTS (Cheque Truncation System) cheques which can help identify whether the cheque book the individual currently holds is CTS compliant or not," says Diwanji.
The key features:
- Words 'CTS 2010' printed on the left hand side of the cheque leaf near perforation
- All cheques carry a standardized watermark, with the words 'CTS-INDIA' which can be seen when held against any light source
- Pantograph with hidden/ embedded word 'VOID' is included in the cheques. The word is clearly visible in photocopies of a cheque
- The right hand corner of the cheque leaf has boxes provided for the date which is in the DD/MM/YYYY format
- New Rupee symbol inscribed near the numerical 'amount' field
Individuals can look for the following features. If these features are present in the cheque book, it is a CTS compliant one.
Get your new cheque books
"Banks may not automatically issue new cheque books to all customers since very few NRIs use cheques currently as most of them use internet banking for transfer of funds," Diwanji says.
You would thus need to watch out for any communication from your bank regarding issuance of new cheque books. You could also check your bank's website for instructions. Banks would ideally send a communication informing the customers about the new regulations and asking the customers to contact the bank for requesting new CTS 2010 standard cheque book depending on their need and then asking customers to either destroy or surrender the old cheques post they receive the new cheque book.
(The author is a chartered accountant and financial writer. She also blogs at http://blogs.economictimes.indiatimes.com/moneyhappyreturns/ )
For the lakhs of Indians working abroad and their families back home in India, these are indeed good times. The sharp depreciation in the local currency means the money they send home fetches more rupees on conversion.
In fact, a World Bank report says that India's migrant workers are expected to rush back more dollars home this year to take advantage of the weak rupee. At an estimated $71 billion (Rs 4,40,200 crore), India will be the top recipient of official remittances this year. This is besides the huge sums of money sent back home through informal channels.
If you are among such NRIs, you would want to put the money to productive use by investing in high return generating instruments. Despite the ongoing slowdown, India continues to offer numerous investment opportunities for foreign investors, who do not enjoy such high rates in their country of work. The current volatility has created attractive entry points for NRIs across a range of asset classes. If you are looking to invest in India, what are the options you should consider? Before we delve into the choice of investments, let us consider the formalities and procedures that NRIs have to follow to be able to invest in India.
How to begin
If you wish to invest in India, the first step is to open a savings bank account. There are three basic types of bank accounts for NRIs.
Go for a non-resident external (NRE) rupee account if you are looking to remit overseas earnings to India and hold them in rupees, as also repatriate the proceeds of your investments back to your home country without any restrictions. An NRE account is completely tax-free and no tax is payable on the interest earned on the balance.
But you cannot put income from rent, salary and dividends in the NRE account. For that you need a non-resident ordinary (NRO) account. However, the interest earned on the NRO account is taxed at the marginal rate of 30% plus surcharge and cess. The balance in the account is also subject to wealth tax.
The advantage is that NRO accounts can be jointly opened with a resident Indian. If you do not wish to be exposed to exchange rate risk, you can instead open a foreign currency non resident (FCNR) account with a local bank, where your funds are held in the foreign currency, and not converted to rupees.
In order to open an account, you can either visit the nearest branch of the Indian bank in your home country, if any, or send the completed application form (you can get it online) along with the documents to any of the branches in India (see box).
Tax liability for NRIs
You should be aware of the tax implications on investments in Inida. Although there is no difference in the tax rates for NRIs and resident Indians, the tax is compulsorily deducted at source in case of NRIs. So your share broker, mutual fund and bank will deduct tax before giving you the redemption proceeds.
Worse, the TDS is charged at the highest applicable tax rate for that investment category irrespective of the actual liability (see table). For instance, you may not have any tax liability due to losses incurred on another investment but your broker will still deduct the tax.
Where to invest
For many NRIs, property is the primary choice of investment. The bulk of their money is directed towards real estate investments. However, some experts feel this is not the ideal route for all NRIs.
S.P. Dhanapal, financial planner, Sudha NRI Consultants, insists, "Often, NRIs lock-up a chunk of their money in property, which remains unused. This leaves no scope for liquid investments. They would be better off making liquid financial investments." Also, real estate investments here involve a lot of hassles and the lack of transparency makes it a tough proposition to find a desirable property.
If you are willing to look beyond property, there are a lot of options to park your funds. While considering any of these options, the major deciding factor should be the expected return, and not the exchange rate, asserts Hemant Rustagi, CEO, Wiseinvest Advisors.
"NRIs stand to benefit from investments here when the rupee appreciates against the dollar. Since the exchange rate can go either way, you should focus more on taking a longterm view and picking high-return instruments," Rustagi adds.
As a start, NRIs should take advantage of the superior rates of interest offered on deposits in India. Interest rates are at high levels but are expected to come down in the near future.
It is common knowledge now that the Government of Indiaallows you to remit funds up to USD 1 million per financial year abroad. But how exactly do you go about doing it? What are the documents you need to submit? Can you do it from abroad? Let's take a look.
Remittance regulations, a review
As part of its liberalization scheme, the Reserve Bank of India has over a period of time made it easier for NRIs to remit funds from India to abroad. As of today, balances in the NRE account are freely repatriable. That is, you do not need any permission for remittance abroad for any amount. Broadly, the funds in this account are usually funds deposited from abroad or in some cases, current income like interest or dividends on investments made through foreign funds.
Balances in the NRO account are not freely repatriable. But the RBI does allow NRIs to remit up to USD 1 million per financial year from the NRO account, provided you follow certain procedure. The funds in NRO account are usually from income earned locally, like rent on a property in India or certain capital account transactions like sale of property purchased prior to becoming an NRI.
In order to remit funds from the NRO account, you would need to submit two documents: Form 15 CA and Form 15 CB. The purpose of both these documents is to ensure that taxes are collected on the funds before they are remitted abroad as it becomes difficult to recover taxes at a later stage. Both these forms consist of more or less the same information. The only difference is that Form 15CA is an undertaking by the NRI to remit funds while Form 15 CB is a certification of the information by a chartered accountant. Here is the process:
Step 1: Submit Form 15 CA - Undertaking of information
You need to submit this form online on the website of the Tax Information Network www.tin-nsdl.com . This form will consist of the remitter's information such as name and address of the NRI, permanent account number, complete details of the overseas account to which funds are being remitted etc. It will also contain details of the accountant who will be certifying Form 15 CB.
"After you submit Form 15 CA online, you will get an acknowledgement. You would need to print the acknowledgment, sign it and submit it along with Form 15 CB to the bank," explains Sandeep Shanbhag, Director of Wonderland Investments and an expert on all NRI financial matters.
Access: Form 15 CA
Step 2: Submit Form 15 CB - chartered accountant's certificate
You need to get this certificate from a chartered accountant who will certify that you have paid all taxes due in India on the funds that you plan to remit abroad. The certificate will specify the nature of the amount to be remitted: that is, whether it is the remittance of dividends, interest, royalties received in India or any other income. Your chartered accountant may require you to submit copies of your Tax Residency Certificate, if any, in case you are availing a lower rate of TDS under the Double Taxation Avoidance Agreement.
Can you do this from abroad? "Technically, it is possible to do this from abroad because the procedure is online. But it may be a bit difficult to do it, practically. Your chartered accountant would have to send you the hard copy of Form 15 CB. You would need to sign the acknowledgment of Form 15 CA and then send both these documents to the bank's branch in India," Shanbhag says.
If your remittance consists of interest from the NRO deposit, the bank is required to deduct tax at source on the interest at the rate of 30%. Suppose you live in the US or UK or any other country that has a DTAA with India, then you are eligible for a reduced TDS rate of 15%. The bank will require you to submit a Tax Residency Certificate from your country of residence if you want to avail of this reduced rate.
Now there is a peculiar scenario of DTAAs that India has signed with countries that do not have personal tax. Shanbhag explains, "The basis of a DTAA is that a particular income is taxed in both countries. However there are instances where a foreign country may not levy personal tax on its residents, yet India has a DTAA with those countries that allows NRIs of those countries to avail a reduced rate of TDS. This is a grey area."
In such cases, each bank might have its own way of handling this. Some banks like the State Bank of Indiarequire you to submit a self-declaration form if you reside in a country that has zero tax, but has a DTAA with India that offers a lower rate of TDS. On submitting this self declaration, the bank will deduct tax at source at the reduced rate instead of the mandated 30% rate.
The declaration however states that the NRI 'shall be fully responsible to State Bank of India for any Indian Income tax liability including interest, penalty etc. that may arise on account of the bank applying a lower rate for tax deduction at source based on this declaration.'
You would therefore need to check with your bank to see what procedure is followed.