The difference between NRE and NRO accounts

There are two options an NRI interested in opening a bank account in India can choose from – an NRE or an NRO account. Are you an NRI keen on getting a bank account opened in India? Then it would be advantageous to know how these two types of accounts differ and which one is right for you.

 

The Government of India has permitted NRIs to open rupee accounts in India in order to repatriate funds from their home countries. The two most common accounts are the NRE and NRO accounts. Let’s take a closer look at them.

 

What’s an NRE account?

A Non-Resident External (NRE) account is a bank account that’s opened by depositing foreign currency at the time of opening a bank account. This currency can be tendered in the form of traveler’s checks or notes.

 

What’s an NRO account?

A Non-Resident Ordinary (NRO) account is the normal bank account opened by an Indian going abroad with the intention of becoming an NRI. An NRI can also open this account by sending remittances from his home country or by transferring funds from his other NRO account. It offers the same facilities as an NRE account, except that any repatriation done through this account should be reported to RBI by filling up prescribed forms.

 

How do NRE and NRO accounts differ?

Funds remitted from overseas sources or local funds that would otherwise have been sent to the accountholder abroad can instead be transferred to NRE Accounts. On the other hand, local funds that aren’t eligible to be remitted abroad must be credited to an NRO account.

 

Can you transfer funds fromanNREto anNROaccount and vice versa?

It’s easy to transfer funds fromanNREto an NRO account. But it’s not possible to transfer funds from an NRO account to an NRE account. Once you transfer funds fromanNREtoanNRO account, the amount is non-repatriable. Consequently, you cannot transfer it back.

 

What’s the difference in the tax treatment for interest earned on an NRE and an NRO account?

The interest earned on any type of NRO bank as well as the credit balances in this kind of account are taxed under the account holder’s tax bracket. On the other hand, interest earned on the NRE account is totally exempted from income tax, and the credit balances in the account don’t attract any wealth tax. Any gift given to a close relative doesn’t attract gift tax.

Banking in India: fixed deposit options

Are you a person who is averse to taking risks when it comes to making investments? Afraid to risk your money on stocks and too busy to track a mutual fund portfolio? Have some spare cash and want to keep it liquid but wouldn’t mind some interest on it?

If you answered ‘yes’ to any of the questions above then Fixed Deposits (FDs) are an option you could consider. As an NRI / PIO, you can opt for fixed deposit schemes in almost all private and nationalized banks in India.

RBI Directives

The Reserve Bank of India has prescribed time limits for which FDs / term deposits can be made.

• Foreign Currency (Non-Resident) Account (Banks) Scheme (FCNR (B) Account) – 12 months to 60 months.
  
  
• Non-Resident (External) Rupee Account Scheme (NRE Account) and Non-Resident Ordinary Rupee Account Scheme (NRO Account) – Duration is at the sole discretion of the bank offering the deposit scheme.

Banks generally do not pay any interest if these fixed deposit accounts are closed before the 12-month period.

Types of FDs

The minimum amount you would require to open a fixed deposit account is USD 600. You can choose from two types of FD accounts:

• SPECIAL TERM DEPOSITS: The earned interest is added to the principal and compounded quarterly. This amount is accrued and repaid along with the principal amount on maturity of the deposit.
  
  
• ORDINARY TERM DEPOSITS: The earned interest is credited to the investor’s account, held with the bank or in a bank account of his choice, once a quarter. In specific cases, interest may be credited on a monthly basis. However, this is at the sole discretion of the bank in which the deposit is made.

The interest rate on these fixed deposits is very high and is compounded on a quarterly basis. Also, the earned interest amount is exempt from income tax.

It is possible for you to get loans against fixed deposits as well. However, these loans are provided subject to restrictions on the use of the deposited funds. The interest rate applicable to loans against FDs ranges between 7% and 10.5%.

Special FDs

If you hold a Non Resident (Special) Rupee (NRSR) account, you can make an FD for any period ranging from 15 days to 10 years. However, the interest rates applicable to the deposits will be the same as those offered to resident investors. Further, the principal amount and the interest earned on the deposit will be non-repatriable and the interest earned will be subject to tax deducted at source by the banks.

 

Why residential property prices never fell in cities

The last time Bharat Sharma went looking for a house that fit his budget of Rs 40 lakh was in January 2011. Prices were high then and so were interest rates.

The same month, he came across reports about a possible correction in property prices in the next one year.

The arguments were compelling. Property prices and interest rates were high, making EMIs unaffordable. Income growth had slowed down, job creation was on the wane, inflation was high and there was oversupply in the market.

With everything pointing to property prices coming down, Sharma decided to wait. He is now back in the market looking for a property, with a slightly higher budget (Rs 42 lakh).

But contrary to his expectations, prices have not gone down. In fact, they have risen. "The project that I was considering is now sold out and the others launched recently in the same locality are quoting at higher prices," he says. Why did property prices defy what the market pundits were expecting? What prevented them from falling?

Continuing investor interest

Investors are the lifeline of a cash-strapped developer. They are the ones who are keeping builders afloat even now.

Pankaj Kapoor, managing director of real estate research firm Liases Foras, explains that compared to 1995, when there was shortage of liquidity in the market which led to a crash in the real estate sector, the situation now is quite different. "There are hardly any avenues which offer you safe returns today.

The stock markets are volatile and gold prices are also at an all-time high. So, investors look at the real estate sector to park their excess funds. It is not the developers who would have to take a price cut but the investors," he adds. According to Kapoor, it is the investors who are instrumental in the property prices staying firm.

"Besides this, there are a lot of venture capital firms which have bought huge stakes in realty projects. For the developers, it is a win-win situation. Since they have already cut down on their losses, they won't be losing much even if the rates come down a bit," he adds.

However, in some cases it is also because of these investors that the builders cannot reduce prices substantially. "A big investor who puts in money at the pre-launch stage of the project is also looking to exit at a higher rate later," says a Gurgaon-based real estate broker. "If the developer reduces the ticket price, the investor will not be able to sell his properties in the market and, therefore, will not invest in the builder's projects in future," he says.

Gilt funds get the edge on RBI rate cut hopes

Gilt funds are turning popular with investors once again amid signs that the Reserve Bank of India will ease its monetary policy at its next review. Net inflows in gilt funds turned positive at 458 crore in December after a year, according to monthly data released by Association of Mutual Funds of India. Their assets under management went up to 3,121 crore in December from 2,663 crore in the previous month.

"Fresh investments in gilt funds indicate that market is expecting interest rates to come down," says Deepak Panjwani, head of debt markets at GEPL Capital. Gilt funds invest in government securities, which are considered ideal instruments to ride interest rate cycle because they carry little risk of default. If interest rates fall, bond prices go up and, in turn, push up the net asset value (NAV) of the gilt fund.

The RBI has hiked interest rates 13 times since March 2010, pushing up the repo rate to 8.5%. Rising interest rates deter investment in long-term bonds, whose prices move downwards with every rise in interest rates.

In the December quarterly monetary policy review, the RBI paused its rate hike cycle. The market interprets this as a change in the central bank's stance from hawkish to neutral. "We expect interest rates to come down by 100 basis points over next six months," Panjwani said.

Market players have started discounting the future well in advance. The benchmark 10-year bond yield is on the way down. The yield came down 34 basis points to 8.22% on January 12 from 8.56% on December 30, benefitting gilt funds.

According to Morningstar India, a mutual fund tracker, long-term gilt funds delivered an average return of 2.09% against 0.87% posted by short-term bond funds over last one month. This is a trend reversal. Short-term bond funds and liquid funds outperformed gilt funds when rates were rising.

"The average maturity of long-term government bond funds has risen to 8.7 years compared with 4.5 years in January 2011," says Dhruva Raj Chatterjee, senior research analyst at Morningstar. NAV of gilt funds with high average maturity should move up faster than their counterparts with low average maturity if rates fall and vice versa.

Life insurers' income falls for first time in a decade; investor indifference to Ulip the main reason

India's life insurers face the prospect of growth faltering this fiscal - for the first time since the opening up of the industry - as a combination of regulatory restrictions and investor indifference to unit-linked insurance products, or Ulip, hurt sales of what was once the industry's best-selling product.

The slide in Ulip sales and a lack of pension products in the market have had an impact on the industry's total premium income, which has been negative year on year so far this financial year. "For the first time since the sector was opened up, the total (year-on-year) premium is negative," said SB Mathur, secretary general, Life Insurance Council. "Very few Ulip products are selling. People are looking for guarantees," he said, summing up the state of the industry and investors.

The rate of increase in renewal income has dropped from 10% to 4% this year. There has been a fall in the number of policies sold, too. While the industry had sold 4.8 crore (480 million) policies in 2010-11, it has been able to sell only 300 million so far this year.

With just two months to go for the financial year to end, insurers say it is unlikely that they will be able to match previous year's sales figure.

In 2010-11, the average premium on policies rose from about 5,000 to about 15,000. The total premium income was, therefore, positive even though there was a decline in the number of policies sold. The tide started changing for insurance companies from September 2010, as policyholders started opting for conventional policies, such as moneyback and traditional pension policies, due to a change in regulations that rendered Ulips unattractive.

Under the new rules from insurance regulator Irda, policyholders have to stay invested in a Ulip for five years, compared with three years earlier. The bearish sentiment in the stock markets has also hurt Ulips popularity, since they were unable to post decent returns, putting off investors.

Franklin Templeton launches fund that will invest in US firms

Franklin Templeton Investments (India) today launched an open-ended fund which will invest in US-based companies across sectors as part of its international diversification approach.

The new fund offer (NFO), FT India Feeder, will close for subscription on January 31, the private mutual fund house said.

"International diversification is the key ingredient for long-term success of an investment portfolio as the level of asset management have not grown since the last two years due to increased market volatility. This has increased the acceptance of diversification as a key investment tool," Franklin Templeton India President Harshendu Bindal told reporters here.

Indian investors traditionally have had a low exposure to global funds due the relatively better performance of domestic markets, he added.

The NFO will help investors achieve diversification through exposure to high quality US companies that are currently trading at attractive valuations, Bindal said.

The total asset under the master fund (Franklin US Opportunities Fund) is about about USD 2.4 billion.

RBI to hold rates steady next week, CRR cut unlikely: Poll

entral bank will not cut interest rates at its review on Tuesday, although it is nearly unanimously expected to do so by the end of June, a Reuters poll of 22 economists showed.

7 out of 20 respondents expect the Reserve Bank of India to cut banks' cash reserve ratio (CRR), the proportion of deposits that must be held with the RBI, by 25 or 50 basis points from its current 6 per cent on Tuesday.

A CRR cut would ease tight liquidity conditions in the Indian banking system and signal easing intent of the RBI, which remained hawkish far longer than most central banks and raised its policy interest rate as recently as October -- its 13th increase since early 2010.

While none of those polled expect a cut in the RBI's policy repo rate on Tuesday, 8 of 22 foresee a cut by the end of current financial year in March and all but 1 expect the key rate to be cut by the end of June.

"The inflationary potential in the economy remains huge. So the Reserve Bank of India is unlikely to risk an interest rate cut or cash reserve ratio on Jan. 24," said Arun Singh, senior economist at Dun & Bradstreet.

India's headline inflation slowed in December to a two-year low of 7.47 per cent as food price pressure eased dramatically, but manufactured products inflation edged up from November, a sign that core inflation remains sticky.

Factory output grew 5.9 per cent from a year earlier in November, the fastest clip since June, recovering from a contraction in the previous month and well above the forecast 2.2 per cent growth in a Reuters poll.

The cash rate remains entrenched above 9 per cent and banks' borrowings from the central bank's repo counter have averaged 1.22 trillion rupees ($24.1 billion) so far in January, more than double the RBI's comfort zone of 600 billion rupees, a sign that supply is crimped.

That has prompted some in the market to call for a CRR cut, with heavy government borrowing planned for coming weeks.

"A 50 basis point in CRR will not dilute the anti-inflationary stance. And the RBI could look at supplementing the CRR cut with more OMOs," said Abheek Barua, chief economist at HDFC Bank, referring to debt buybacks by the RBI through open market operations.

Barua said that if the RBI cuts CRR, it should do so as a liquidity management step, not a rate measure.

Last week, Subir Gokarn, the deputy governor of the central bank in charge of monetary policy, was quoted by a newspaper as saying that "lowering CRR will be contradictory to the anti-inflationary stance." A week earlier, he said the interest rate cycle in India had peaked.

The RBI has raised its policy rate by a combined 375 basis points since early 2010, lifting its key lending rate, the repo rate, to 8.50 per cent. It has not moved the CRR from its current 6 per cent since April 2010.

Where should NRIs invest their gains from a weak rupee

he rupee was quoting at 44.8001 against the US dollar seven months ago, and has depreciated 18.28% since then. A falling rupee is not the best news for us, but it definitely is for exporters and NRI investors who will receive more rupee funds on conversion. Given the current scenario, NRIs have some good investment options to park their surplus funds.

Short term (6 months to 1 year)

Fixed income mutual funds: A range of fi xed income mutual funds offer customers the combined benefi t of attractive returns with full repatriability, low cost, convenient processing and ease of portfolio tracking. Safe investors should opt for liquid plus funds.

Bond funds/longer-duration gilt funds: They are meant for investors who are comfortable with some price uncertainty. "They can benefit from any potential capital gain arising out of any reduction in future interest rates. Also, any appreciation in the rupee over the investment period would imply additional returns," VISHAL KAPOOR, Head, Wealth Management, Standard Chartered Bank, India.

NRE deposits: "They are clearly the best option after the deregulation by RBI. Short-term deposit rates are attractive due to tight liquidity conditions in money markets while being tax free," SUTAPA BANERJEE, CEO - Private Wealth, Ambit Capital.

Medium term (1-3 years)

Balanced mutual funds/NRE deposits: You can opt for either of these instruments depending on whether the horizon is one or three years, respectively. "The choice depends on the kind of price volatility and whether the investor is seeking a guaranteed return or not," JAYANT PAI, CFP, Vice-President, Parag Parikh Financial Advisory Services.

Fixed maturity plans: They are an attractive option for customers looking to locking in at prevailing high rates. For risky investors, Indian equities may offer signifi cant long-term opportunities. "Investors could participate through selective stocks or through a wide range of equity funds with good track record. The quarter ahead may offer selective buying opportunities for active investors, or one could choose to simply stagger investments through a defi ned period, using systematic transfer from debt to equity funds," says Kapoor.

Long term (3 years or more)

Diversified equity funds (through SIPs): They are good options at the current rates. FDs are not a good option as the uncertainty of foreign exchange movements may not be fully compensated by interest rates. "However, risk averse depositors may chits. Gold ETFs are also a oose long-term NRE deposgood option," says Pai. Investors should allocate their funds using a strategic allocation model tailored to their individual risk profi le. This should normally combine debt, equity as well as alternative assets. Clearly, debt offers a very attractive opportunity in the near term but one should also keep in perspective the attractiveness of Indian equities over the medium to long term.

Realty Check

Real estate as an investment option makes sense if you plan to return to India after some time. However, you should choose a location that is familiar to you and stick to a reputed builder, given that proximity is an issue.

From a pure investment angle too, the same caveat applies: Familiarity and reputation. Also, there is greater chance that projects of reputed builders will appreciate more than others'.

Also, as NRIs are not permitted to purchase plots of land/plantations/farm houses. Even commercial real estate is subject to a plethora of limiting regulations. Purchasing apartments or bungalows maybe the only options available.

It is difficult to give a ballpark estimate regarding returns, as it will depend on the location and various other factors.

However, as an investor you have to be cautious in the near-term since it is an interest rate sensitive sector and demand may be impacted by relatively high interest rates.

"It is imperative to find out whether one is allowed to invest in an instrument by RBI as well as by the country of their residence. For example, several bonds don't have separate clauses which allow for NRIs to invest in them," says Banerjee of Ambit Capital .

Choosing The Right Investment

Liquidity, post-tax returns, price volatility and credit risk are the crucial factors that should determine the choice of the instrument you invest in.

The amount of foreign exchange risk one is willing to undertake is also a crucial factor. Of course, the forex risk is always present in all options other than FCNR deposits.

Convenience and trust need consideration. One may choose those options where he/she can transact online. This enables easier portfolio tracking.

Suitability of the product/asset based on endogenous factors such as age, economic situation, liquidity considerations etc. are the same as those for resident Indians.

Sucheta Dalal :IDFC L&T Infra drop interest rates for tranche2 —IFCI is good bet

Sucheta Dalal :IDFC L&T Infra drop interest rates for tranche2 —IFCI is good bet

SBI tax saving deposits—can it really fetch you 17.77% return? - Moneylife Personal Finance site and magazine

SBI tax saving deposits—can it really fetch you 17.77% return? - Moneylife Personal Finance site and magazine

SBI’s tax saving deposits advertisement claims to give you 17.77% return. While it assumes you are in the 30% tax bracket at the time of investment, it conveniently calculates the return without considering tax obligation on the interest generated at the time of exitDuring the tax savings season, people are desperate to save Rs30,900 in taxes by investing their hard-earned Rs1 lakh in certain kinds of savings instruments. One such avenue is a tax-saving fixed deposit (FD) which is for a five-year term without option for premature withdrawal. SBI has put a front page advertisement in Times of India and other leading national dailies claiming to give 17.77% effective annual yield. It assumes you are in the 30% bracket (which may not be true) and it gives an effective annual yield without considering the tax on the interest generated, which could be up to 30%.While your effective annual yield will vary based on your tax bracket at entry and exit, SBI’s calculations in the advertisement shows the slick marketing which wants to consider highest possible tax savings on entry and no tax liability on exit. It is misleading to an average investor who can get dazzled by the big returns claimed in the advertisement. This kind of advertisement is usually seen with infrastructure bonds giving tax benefit under 80CCF for Rs20,000 investment. Last year, IDFC bond claimed a tax-adjusted yield of up to 17.85% to investors on buyback (after five years for 10-year bond), which was confusing to the average investor. The company was offering 8% return last financial year.On a positive note, SBI’s rate of interest for tax savings five-year FD is 9.25% per annum (p.a.) which is also the same as it offers for regular FD. In the past, tax savings deposit FD used to offer a little lower rate than the regular FD. With tight liquidity for banks, they want to entice deposits with high interest rates. It is important to note that there is no option for premature withdrawal even with penalty for tax savings FD and the interest is taxable. There are other better options for tax savings under 80C. Consider all the options before jumping in with tax savings FD.SBI has been advertising heavily for attracting big deposits. It is giving 8.5% p.a. interest for deposit of Rs1 crore and above for only seven-day FD. This is a good option for high-net-worth individuals, who want good return as well as liquidity.