Best Asset Class Right Now For NRIs Investing In India

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.

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