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Mutual funds and equities typically hold appeal for investors with an appetite for risk; however assured return instruments are likely to find favour with risk-averse investors. NRIs are not permitted to invest in any of the small savings schemes including Kisan Vikas Patra (KVP) and Post Office Monthly Income Scheme (POMIS). This leaves fixed deposits as a plausible investment alternative for NRIs.
Fixed deposits as an asset class offer NRI investors a wide range of options to choose from. Even an investor with an appetite for risk can consider investing in fixed deposits to hold a complete and well-diversified portfolio across asset classes. We profile some of the options available to investors.
(A) Fixed deposits held under NRI bank accounts.
1. Foreign Currency (Non Resident) Account (Banks) Scheme: FCNR (B)
Popularly referred to as the FCNR (B) deposit, this account can be held only in the form of fixed deposits. The account can be opened by NRIs and jointly held with two or more non-resident individuals. FCNR (B) deposits are denominated in Pound Sterling, US Dollar, Japanese Yen or Euro. Remittances received in any other currency can be converted into the designated currencies by the authorised dealer at the depositor's risk and cost.
Interest rates
Upper limits on interest rates are determined by directives issued by the Reserve Bank of India (RBI). However banks are permitted to discriminate on the interest rate based on the deposit size. Deposits over the specified amount (determined by banks) can be offered higher rates of interest.
Tenure
The tenure of fixed deposits is also determined by the RBI. Deposits can't be offered for a tenure of less than 1 year or more than 3 years.
Repatriation
The account is fully repatriable in nature i.e. the both the principal amount and interest can be repatriated by the investor.
Following are details of some of the FCNR (B) accounts offered by leading banks.
2. Non-Resident (External) Rupee Account Scheme: NRE
NRE accounts can be held by NRIs in the form of a savings account, current account, recurring deposit and fixed deposit. A joint account can be operated along with two or more non-residents. The account is denominated in Indian rupees.
Interest rates
Interest rates on NRE deposits are determined by the Reserve Bank of India. LIBOR/ SWAP rates for US Dollars of corresponding maturity are used as parameters to determine the same. Banks have been granted the permission to offer differential rates of interest for deposits exceeding Rs 1,500,000 i.e. Rs 1.5 million.
Tenure
Banks are granted the discretion to decide the tenure for fixed deposits offered by them.
Repatriation
NRE deposits are repatriable in nature. Hence the investor has the liberty to repatriate both the principal amount invested and interest earnt on the same.
Following are details of some of the NRE deposits offered by leading banks.
3. Non-Resident Ordinary Rupee Account Scheme: NRO
NRO accounts can be opened by any person resident outside India and be jointly held with residents. The account can be operated in the form of a savings account, current account, recurring deposit and fixed deposit respectively. NRO accounts are denominated in Indian currency.
Interest rates
Unlike FCNR (B) and NRE deposits where interest rates are administered by the RBI, banks are free to determine interest rates offered on fixed deposits held under NRO accounts.
Tenure
Banks decide the tenure for which fixed deposits are accepted. The periods must correspond to those applicable for fixed deposits offered to residents.
Repatriation
NRO accounts are not fully repatriable like the FCNR (B) and NRE accounts. If a fixed deposit is held under a NRO account, the interest income is repatriable but principal amount isn't.
Following are details of some of the NRO deposits offered by leading banks.
Liquidity
Liquidity can be a bugbear for investors in fixed deposits. However the abovementioned fixed deposits can be prematurely withdrawn by investors. The penalties to be levied (if any) in case of premature encashment are determined by banks. Similarly there are provisions in place for minimum periods before which no interest payments will be made in case of premature withdrawals. Investors would do well to find out the terms and conditions governing their fixed deposits before making an investment.
Taxation
The tax liability on interest income is a high-priority area for most investors including NRIs. Fixed deposits under the FCNR (B) and NRE accounts are not taxable at present, while NRO deposits are taxable in nature and attract TDS (tax deductible at source) as well.
These regulations are about to undergo a significant change shortly. In the recently concluded Budget, the Finance Minister has proposed that tax concessions granted to fixed deposits under NRE and FCNR (B) accounts should be discontinued. This proposal is likely to be implemented from April 2005.
(B) Deposits from companies and other institutions
NRIs can place deposits with companies incorporated in India. However these deposits are unsecured in nature i.e. they are not backed by assets making them high risk propositions. Also in recent times a large number of companies have expressed their unwillingness to accept fresh deposits. If you are investing in fixed deposits on account of a low risk appetite, avoid getting invested in an unrated company deposit.
On the other hand, NRIs can consider choosing deposits with a "AAA" rating offered by institutions like HDFC Limited. These investments carry the highest degree of safety making them the right fit for the risk-averse investor. Investments are accepted from NRO accounts and are also subject to TDS as applicable. These deposits can be made for maximum tenure of 3 years.
The attractiveness of fixed deposits has taken a beating in recent times on account of the administered interest rate regime. However they can offer significant value to risk-averse investors even at this stage.
For example, if you wish to provide regular income to your dependents in India, interest receipts from your fixed deposit can be a good source. Similarly NRIs could be faced with an impending liability which has to be met in Indian currency after a stipulated time period. In such a case a fixed deposit of the appropriate amount and corresponding maturity can be used to settle the liability.
If you are an investor who gives more importance to certainty in returns vis-à-vis their attractiveness, fixed deposits should find place in your portfolio.
List of useful websites
The Investment Guide for Non Resident Indians
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How to get your copy?
In Mumbai attending the Pravasi Bharatiya Divas? Call Personalfn at 5599 1234 to get a hard copy of the guide. This offer is only for NRIs currently in Mumbai.
Else, click here to download.