Tag Archives: NRE Deposit

BHARAT BOND ETF – a better option Than NRE FD?

NRE FD has been my preferred low risk, tax free investment option since the time RBI allowed banks to offer interest rates of their choice. However, with the established banks offering only 5% or lesser rates on NRE FD’s, I have been looking for other options that can give higher returns but with same low risk.

A few banks like IndusInd still offer 6.5% rate on NRE FD but with bank deposits being insured only upto 500,000 rupees the risk of loosing money in case of a default goes up (do remember what happened to Yes Bank and other co-operative banks). A bank will only offer interest rate higher than the market rate under 2 scenarios – either they are a new player and want to build a customer base or they are unable to raise funds easily as markets believe their business to be risky.

Bharat Bond ETF is one such instrument that has been on my radar and I wanted to analyse how it stacks against the NRE FD.

What is Bharat Bond ETF?

Its a Fixed Maturity ETF that invests in AAA rated bonds of Public Sector Companies (PSU). These bonds are not the same a Government Bonds (G-Sec’s) but pretty close in terms of risk profile given that govt has majority stake in most PSU’s.

As this is an ETF, an investor can sell the investment anytime on the National Stock Exchange (NSE), thus being extremely liquid. Yes, there would be short term or long term capital gains depending upon the date of sale but calculations suggest that its a good investment even with taxes if held to maturity.

How does it compare to NRE FD?

BHARAT Bond ETF wins hands down even after providing for tax when compared to NRE FD’s from large banks.

For calculations, I have assumed that the investor holds the etf to maturity and inflation averages 3%.

The break even interest differential between the two investments is appx 0.8% with the above assumptions of maturity and inflation. What that means is, in theory, if Bharat Bond ETF yields 6.8% then an NRE FD of 6% will provide roughly the same total return.

Why is Bharat Bond ETF better than NRE FD?

One has to consider multiple factors when considering an investment and not just the yield. The most important factor would be liquidity, default risk and tax impact if you return to India. Bharat Bond ETF provides better risk protection on amounts greater than 500,000 when compared to NRE FD and more liquidity as it is traded on exchange.

Bharat Bond ETF is a better investment than NRE FD irrespective of the interest rate if you have plans to return to India over next 8 years (the tax free benefit of an NRE account ceases within 2 years of returning to India) as the interest from deposits will no longer be tax free. The sooner your plans to return to India the greater the gains from ETF would be when compared to NRE FD.

Inflation protection is the other benefit that the ETF provides – If the inflation increases and averages to say 5%, the indexation benefit will reduce the tax liability as shown in table below

Similarly, if the capital gains are removed or the tax rate is reduced in the future the gains from the ETF will be higher.

So no matter how I look at it, Bharat Bond ETF maturing in 2031 is a better investment as compared to NRE FD for long term wealth accumulation. Instead of opening a fixed deposit buying this ETF makes a lot more sense for all investors whether non resident or resident.

NRE Fixed Deposit rates (November 2020)

With RBI reducing benchmark rates the NRE FD rates have been on a decline though some banks still offer high returns.

NRE Interest is tax free but only guaranteed protected upto a maximum of 5 lac rupees just like any other bank deposits, anything over that is like a unsecured loan to the bank.

So while making a deposit try and spread the risk across different banks if possible. Yes, that means having to manage more than one bank account and if you like the convenience go for a respected and strong bank like SBI though it means lesser return.

BankRateTerm
Indus Ind7%1 to 3 years
IDFC First6%500 days
Standard Chartered5.60%12 months to 21 Months
HDFC5.50%greater than 5 Years
DBS5.50%greater than 4 years
ICICI Bank5.50%greater than 5 Years
SBI5.40%greater than 5 Years
Kotak Mahindra4.90%1 year 1 month to 4 years

When shortlisting a bank, I would not touch a co-operative bank no matter how high a rate they offer, then I would exclude small time private players, then exclude big private players who have grown too fast (remember Yes Bank), then look at Balance sheet and management and even exclude foreign banks like Deutsche and HSBC whose parent entities are struggling. If any foreign bank fails RBI is not going to save it. Lastly look if LIC has a stake in the bank, if yes, then that is a very good indicator of government support and interest (higher chance of bailout if something goes awry).

Click on the Bank Name in the table above and it will take you to the website of the Bank and if you find any other rates that are worth sharing leave a comment and I will add them to the table.

Why Timing is So Important

While it maybe difficult to time any market timing does play an important role and could be the difference between ordinary and stellar returns.

Timing of transferring money to India and investing in NRE Deposits or any other investment vehicle could also mean the difference between a 3% compounded return vs returns of 7% or more.

To illustrate this, I took the money transfers I have done over the past few years and tabulated a return table. I factored in cost of transferring funds i.e. nett money received in India and also the cost of repatriating the money back on maturity and using today’s exchange rate

As you would see the return ranges from anywhere between 3% to 8%, even for transfers which were done not too far apart.

The best returns were achieved when the SGD INR rate was well beyond what fundamentals commanded – like in 2018 the fair value of SGD INR was around 52 and a transfer made at 53.3 generated a superior return

If the exchange rate moved favorably or stayed flat the returns went up. Return matrix using exchange rate of 54

Based on long term interest rate parity, i believe 54.5 -55 is fair value for SGD INR towards the end of 2020. So if the pair crosses 55 and banks are still offering 6% or more NRE FD’s then it would be a good investment to consider.

I would be keen to hear what your experience with generating stable returns in India has been

USD-INR @ 72.5, SGD-INR @ 52.50, what is a better investment FCNR or NRE?

Travelling from Busan to Seoul on a train gives ample time to think about the question many of you have asked – Is it worthwhile to invest in FCNR deposits?

Instead of looking at purely FCNR deposits I decided to do a comparison between FCNR deposits and the good old NRE deposit.

The analysis did become a little tricky as the SGD FCNR deposits have ridiculously low-interest rates and there is no SGD INR forward cover that is readily available in the market and I had to use USD for comparisons.

First of all, lets look at the NRE and FCNR deposit rates on offer in the market for a one year period.

NRE FCNR rates
NRE and FCNR Interest rates as on 11 Sep 2018

Using the best available rates for both NRE Fixed deposit and FCNR deposits we have the below payoff for a one year maturity and expected USD INR rates.

Depositing money in USD deposits in Singapore

This is probably the worst of all the options. The best possible rate for USD deposits in Singapore is 2% and banks charge anywhere between 0.5% to 0.7% to convert SGD to USD and back from USD to SGD. Though one would often see the advert say that there are no charges but the cost is built-in the exchange rate. With the cost of converting money the yield turns out to be mere 0.5%. So unless you are expecting a massive Singapore dollar weakness against the USD this option is best avoided. It is better to keep your money in BOC Smart saver account for better yields.

Investing in USD FCNR with a one year forward cover

The costs involved here are 0.7% to convert SGD to USD, cable charges of atleast 30S$ to transfer money to FCNR account, cost of a forward cover in terms of margin money and brokerage and finally the cost of converting USD back to INR or to SGD and remitting back to Singapore.

With all the associated costs, this option would work if you expect the INR to strengthen back and want to lock the exchange rate at current forward rate of 75. Here the interest on FCNR deposit is tax free but the gains or losses on the forward cover will attract taxes and on the pay off matrix it is not a great option.

Investing in NRE FD

The cost here is simply one time money of 0.5% to transfer money to NRE account and cost to transfer money back if one so desires.

This option gives the stable returns without any complicated transaction setup.

Investing in USD FCNR deposit without a forward cover

The costs here, as in option 2 above, are 0.7% to convert SGD to USD, cable charges of $30 to transfer money to FCNR account and the cost of converting USD back to INR or to SGD and remitting back to Singapore.

Depending upon one’s outlook for USD INR this option can give good returns. If Usd INR crosses 76 over the next year then this option gives better returns than NRE FD but if INR strengthens then one might lose any gains made from interest income.

FCNR NRE Pay off
FCNR NRE Pay Off

So what is the recommendation?

Given the increased uncertainty in global markets predicting the USD INR rate 1 year rate is nothing short of speculation. I personally do not think the USD INR will cross 77 or even if it crosses will stay at that level at the end of one year. To do the FCNR deposit for a very, very small gain over NRE deposit in the event USD INR crosses 76 does not look great from the risk reward perspective but if you really want to try then put half your money in NRE FD and the other half in USD FCNR deposits.

Capital Gains tax for NRIs- It’s not that simple

As an NRI, you would have wondered many times, what parts of your Indian Income are taxable and what are not and trust me you are not alone.

Under the Indian Income tax act, the tax rates, deductions from income, exemptions from taxation all change depending on the nature of income and residential status of the individual. With the ever changing tax provisions, even if you searched online the chances of finding the information you are looking for would not be easy and filtering out the tax provisions that are applicable to an NRI is even more difficult.

Not being able to find consolidated tax provisions on common investments used by NRI’s I decided to compile the information myself and hope that fellow NRI’s will find it useful.

NRI’s mostly invest in Fixed Deposits, Bonds, Mutual Funds, Stock and Property which would generally give rise to income under Capital Gains or Other Income (Bank Interest or Dividends) under the Indian Tax laws.

I have tabulated the provisions that an NRI should be aware of for FY 2017-2018 (click on table to open in new window)

nri-capital-gains

 

One of the most interesting things to note is that the basic tax free exemption is not available to an NRI on Equity Investments.  What that means is that if an NRI gained 2,50,000 Rupee by investing in stock market the whole 2,50,000 Rupee is taxable. If these gains are long term (asset held for more than 1 year) then there is no tax liability but for short term gains the tax rate is @ 15%. So an NRI would pay Rs.37,500 in taxes, the income would not attract any tax in hands of a resident Indian.

Another interesting fact to note is that the gains on redemption of Sovereign Gold Bonds are not chargeable to tax if held till maturity.

With difference in tax rules being different in different countries an investor should consider the tax domicile of the investment to maximise returns. In Singapore and Hong Kong the Capital gains, Bank Interest and Dividends are not taxable, however in USA and UK these income are taxable.

For example if an NRI bought a mutual fund in India that returned 20% over a period of 6 months then his gains would be taxed at a flat rate of 15% resulting in a post tax return of 17%. Buying this same fund in Singapore would have been as the gains are tax free and the investor pays no tax.

Similarly for bonds the interest is taxable in India and taxed at the marginal rate based on your income bracket but tax free in Singapore and Hong Kong.

E.g . An NRI whose total income is over Rs. 10 lac (30% tax bracket) buys a bond that pays 9% interest p.a. The post tax yield of this investment would be 6.3% . Add to it the cost of transferring funds to India of around 0.8%, the yield drops to 5.5%. If the plan is to remit the money back to Singapore on maturity, which will cost another 1%, the investment would yield 4.5% only.

These are just 2 examples to get you thinking. There innumerable scenarios that I can come up with based on different countries of residence and each individuals tax profile. All I would like to highlight is that an investor should not underestimate the impact of taxation and ancillary costs while making investment decisions and look at all aspects before making an investment decision.

Watch out for an investment comparison tool that I am working and will post it here very soon. Till then keep reading and sharing.

Tax Free Bonds: Better than NRE FD’s

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Yes, you read it right! Tax free bonds are better than NRE Fixed deposits.

After all these years of recommending NRE FD’s as the safest bet for investing in India, I am changing my recommendation to Tax free bonds (in no particular order) by IREDA, NHAI, NABARD, REC and HUDCO.

Lets compare the bonds to the NRE deposit

1. NRE Fixed usually give the highest rate for a lock in of 2 or 3 years and are averaging between 7.8% to 8.2%, which means that the reinvestment on maturity would be at the prevailing interests rates.
2. NRE deposits have a penalty in case of pre mature withdrawal
3. Interest on NRE deposits is tax free

A Tax free bond on the other hand is giving a 7.64% for a period of 15 years (NABARD which opens tomorrow – 9th Mar 2016) in retail category (less than 10 lacs) or half a percent lesser for amounts exceeding 10 lacs.

You must be wondering why am I recommending the bonds when they give lesser interest and are tax free like the NRE FD? The Central Bank interest rates across the world are going down and India has already had a few rate cuts which makes these Bonds attractive. As the interest rates will be reduced the value of these bonds will increase (capital appreciation) . These bonds are more liquid than a FD as they are traded on the stock exchanges which means that one can sell the bond without incurring pre mature withdrawal penalty in case of FD. Further for a slightly lesser interest rate these bonds let you lock in a higher interest rate for next 15 years.

If this has not convinced you then let me tell you the most important reason why I am recommending these bonds – interest on NRE FD’s becomes taxable if a NRI returns to India. Depending on the individual residency criteria in section  6 of the Income Tax of India on return a NRI becomes a Tax Resident in 6 months to 2 years, upon which the NRE accounts are converted to a Resident Rupee Account, which means that any interest that accrues on your NRE account after you become tax resident becomes taxable.

These bonds on the other hand assure tax free income for next 15 years from the date of allotment.

Now the fine print – not all bonds are open to NRI’s for investment, however if you have a resident bank / brokerage account you could use that to apply for these bonds and / or purchase them from open market and benefit from capital gains and long term tax free interest income.

SGD INR – Expected Trend till Mar 2013

Its hard to believe that we are already in February of 2013 and that calls for me to keep up on my promise and share with you my thoughts on SGD INR movements in the near term.

The trend so far has been inline with what I had expected in Dec 2012 – The pair has maintained the range of 42-46 with a downward bias (Read more: SGD-INR: How does 2013 look like?) and trades at 42.99 as I write.

SGD INR made multiple attempts to breach the 45 mark but have been unsuccessful. In the meantime a few interesting developments have happened on the fundamental front.

RBI came out and cut the rates by 25 basis points to stroke growth and the financial markets have taken a more “risk on” approach. The former would result in NRE deposit rates being lowered in the long term and the latter would attract FII in to the Indian Markets chasing growth.

At the same time the Indian Finance minister has promised financial reforms and started with reducing the fuel subsidies which helps reduce the Indian Budget deficit. This is also positive for the Rupee.

On the SGD front the currency has lost 2% against the USD and now trades at 1.24 as compared to 1.22 late last year.

These factors combined have seen SGD INR soften below 43 mark.

The question which people ask often is that how low will the pair fall and will SGD INR reach 45 again?

My view is that in the short term the pair would increase and move to cross the Rs.44 mark – The US debt ceiling discussions are due soon and so is Indian budget for 2013.

The uncertainty on the policy front would result in INR weakening against the USD which would mean a weaker INR against the SGD.

The recent spike in Crude Oil prices would add to woes for Indian Rupee.

So in-case the recent drop of SGD/INR has left you scrambling like Oct 2012 then don’t panic – next few weeks should give you an opportunity to see the pair touching 44 again.

 

Enjoy the Holidays and wishing you a very Happy Chinese New Year!! Gong Xi Fa Chai

SGD INR – What’s in store for 2012

2011, what a year it has been for the global markets and SGD INR has been a party to it. The pair started the year at 35.10 and finished at 40.74 a rise of 16%. However the pair has resumed the downtrend and is trading at 39.30 as I write – a drop of 4% from the year-end close.

Let me highlight how the past analysis has fared before delving into how the pair could move in 2012.

In the first post of the series on 23 April 2011 SGD INR – Has anything really changed the recommendation was to convert to INR and invest in deposits. The exchange rate was 35.50 on the date of writing and my recommendation was it could touch 36.5. this target was achieved on 30 May 2011.

The pair continued to move along the interest rate parity line and Tax Adjusted rate line for next 6 months before Rupee began its downslide in Sep 2011 due to weakening economy, uncontrolled inflation and financial turmoil in the global markets.

As Rupee slid from 48 to 54 against the US Dollar (USD) in the next three months its slide against the Singapore dollar was 37 to 41 – drop of 10% against either currencies.

When SGD breached 39 the prediction was for it to ride the momentum and cross 40 SGD Breaches 39 mark, Eyeing 40.

The prediction came true and Rupee went all the way to 41. In the post on 27th Nov 2011 the prediction was made for a pull back with pair ranging between 38.75 – 39.06 40 breached, What’s Next  which is on track as the pair is moving towards the 39 mark.

In the mean time a very interesting development happened as Reserve Bank of India (RBI) deregulated the NRE deposit rates to boost foreign currency supply in the market Now NRE Deposit yield 9.25%, and yes its Tax Free.

Having looked at all these factors here is my take for 2012 (stay tuned for updates every quarter, its very difficult to take a long term view in such volatile markets)

  • INR should strengthen against all currencies and SGD would be no exception.
  • On an Interest rate parity analysis SGD converted to INR and invested in an NRE account would grow to 43.25 in a years time at todays conversion rate of 39.5. The Rule I follow is to convert whenever the actual rate is above the implied rate line
  • With NRE deposits becoming tax free repatriating money in and out of India is easier
  • With Rupee strengthening the gains should be compounded for any investments made in INR

So unless you feel that SGD is headed towards a Rs45 mark in the next year investing in INR is sure to yield good return.

 

NRE Deposit rates offered by Indian Banks

Here is a compilation of NRE deposit rates offered by a few banks

Now NRE Deposit yield 9.25%, and yes its Tax Free!!

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

  1. 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.
  2. Check the cost of conversion when converting back to Forex (Citibank and other foreign banks have usually charge up to 2% so avoid them)
  3. 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