NRE or NRO – that was a constant questions NRI’s always had when investing in deposits in India.
NRO accounts got paid almost same interest rates as the term deposit rates for resident Indians whereas NRE rates were much lesser – almost a half of NRO interest rates (Banks could not offer more than 275 basis points above the global benchmark London Inter-Bank Offered Rate (LIBOR) on NRE term deposits). So if NRO account was fetching 9% then NRE account would get 4%. The catch of course was 2 critical components:
- Interest on NRE deposits is tax-free whereas NRO attracts 30% tax
- Both Principal and Interest in NRE account can be repatriated without any restriction but for an NRO account only interest could be repatriated
With the RBI move to deregulate the interest rates on NRE and NRO accounts on 17th Dec 2011 the stage was set for reform. After 10 days Banks came out and increased the rates on NRE deposits.
The comparison between a NRE and NRO deposit now is extremely compelling in the favor of NRE account.
So here is my recommended strategy
- Use a bank that has a favorable online remittance service to India. The 3 which I prefer are money2india.com by ICICI bank, Axis Remit by Axis Bank, QuickRemit by HDFC (you could use Kotak bank as well but I have not used their service). All the above banks usually take a 0.5%~1.0% cut from the inter bank exchange rate.
- Check the cost of conversion when converting back to Forex (Citibank and other foreign banks have usually charge up to 2% so avoid them)
- Open the NRE Bank account, if you don’t have one, preferably with the bank whose service you want to use to transfer money – get in touch with a relationship manager and negotiate a good exchange rate incase the bank has overseas branch
The only 2 downsides that I can foresee are:
- Rupee continues the downward slide and the interest rate gains are wiped out by currency depreciation (the probability is low)
- Finance Ministry introduces tax on the NRE account and bring it on par with the NRO account in the upcoming budget – if this happens then the yields would go down but the benefit of being able to repatriate money out of India would still remain