Foreign Currency Non-Resident Fixed Deposit is an option for NRIs to invest in the native currency in a term deposit. It’s done through a cheque, wire transfer, currency, or traveller cheque. Since the investment is made in currencies other than the rupee, they are insured against currency fluctuations.
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Rate of Interest
The current FD deposit rates for these deposits is between 2-2.6 per cent. On USD, the annual yield, calculated over the maximum period invested for each period bucket, is higher by about 5-20 basis points depending on how long you are investing.
For Euros, the yield remains the same as the interest offered, which is about 0.01 per cent per annum. While the general rules may vary, if there is a withdrawal before the expiry of one year, then no interest would be paid. If this withdrawal is made after one year, then proportional interest is paid.
Taxation and Repatriation
The interest and principal that is received from these deposits is interest-free, and there are no limitations on the amount that can be repatriated to the home country. Just because the interest and principal are tax-free, doesn’t mean that the entire income is received. FCNR FDs are subject to double taxation treaties with the other country.
NRE FDs
Non-Resident External Fixed Deposits are another investment vehicle for NRIs to invest in. However, unlike FCNR deposits, the investment is made in rupees. Compared to FCNR, NRE deposits have historically performed better. This higher performance remained the same even before RBI had relaxed norms for foreign investments. One major reason for this is that NRE offers two types of deposits, savings deposit and term deposit. Besides this operational convenience, there is the forex advantage of investing in the rupee. This speculative benefit can increase net gain.
Rate of Interest
NRE funds are either foreign funds or certain repatriable rupee-funds. The rate of interest offered depends on the quantum of investment. If the investment is less than Rs. 2 crores, then the rates vary between 6-6.5 per cent depending on the period of investment. However, if the quantum of investment is higher than Rs. 2 crores, then there is a difference of about 50 basis points for the respective period mentioned above. Certain banks levy a penalty for premature withdrawal for withdrawals done before maturity.
Taxation and Repatriation
Just like FCNR FD, the taxation rules are subject to the guest country’s tax rates and the DTA with India. All funds from both types of accounts are freely repatriable.
Which One to Prefer?
The taxation and repatriation rules for both of them are the same. Therefore, that’s not a consideration for deciding. One major factor is your intention.
FDs are generally for three years or more.
Savings deposits offer more flexibility.
If it is higher liquidity, then NRE is your best bet. However, NRE is subject to currency fluctuations. There’s a good chance you may get a lesser net gain because of forex-negative transactions. Therefore, if you want risk-averse investment, then FCNR is what you should go for. If you want to engage in speculation, then NRE is better.