Tag Archives: NRI

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.

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The Fall and Rise of Indian Rupee: 45 days to lows, 45 to recovery

What a roller coaster ride the past 3 months have been!

The rupee was trading at 48.6 against in the US dollar on 31st Oct 2011 and precipitated to touch 53.70 on 15 Dec 2011, a 10% drop. These were the historic lows for the currency and with RBI’s policy changes the rate as I write is 50 against the dollar with RBI reducing the CRR rate and rupee gaining 7% from the lows.

Inflation, falling growth numbers, uncertainity in Europe (which by the way still exists) and political roadblocks to financial reform were stated as the reasons for the weakness. All the reasons held resposible for rupees weakness are still there. Yes, inflation has eased a bit but thats pretty much the only change.

Among numerous suggestions aired to aid the rupee was for RBI to conduct open market purchases in style of Indonesian Central bank which burnt 8-9% of its foreign reserves to stabilise the rupiah. RBI however refrained and relaxed rules to make term deposits attractive for Non Residents Indians – and NRI’s did bring in money into India.

Lets see how has rupee faired against the other currencies in the past 90 days

Surprised – right!! You did not expect to see these numbers, neither did I.

Interestingly after 3 months the INR has returned back to almost where it started against all major currencies and even managed a small gain against GBP and EUR

Against the USD the losses are paltry 2.6% which is close to long term volatility number. JPY on the other hand does come up as unexpected top winner against the Rupee with gains of 3.4%, but the real numbers are the ones shown in the last column.

Extreme volatility is what the data screams – with rupee having lost over 10% against USD and JPY and over 5% against the other pairs.

Question now would be are we expecting another such bout of swings in the market?

I would say unlikely unless a sovereign default event happens.

and how about the direction of Rupee?

I am putting my money on a stable to moderately strong outlook. The RBI has held the repo rates, the CRR ratio has come down and with a weakened currency there should be a a bigger impetus on exports which should all be Rupee positive. However the political instability and global financial turmoil could more than negate any positive factors so 49 – 51 against the USD is what I would  be looking at till end of 1st quarter.