Friday, February 12, 2016

Opening an NRE Fixed Deposit? Compare Interest Rates among Banks

NRE Fixed deposits are one of the best options for NRIs. It's safe, offer fixed and good returns and most importantly interest earned on NRE fixed deposit are not taxable in India. On top of that, you can also repatriate (send money to overseas from India) both principle and interest. Still, there are a couple of things every NRI should know about NRE fixed deposit before booking. Most important of them is that minimum tenor for earning the interest on NRE Fixed Deposits is 1 year. If you withdraw or break your NRE FD before 1 year then no interest will be paid.


This is a really important condition because if you need money even in last month of the year and you happen to break the NRE Fixed deposit, you won't get any interest. On the flip side, Resident fixed deposit and NRO fixed deposits do get interest but lesser than contracted rate due to penalty applied for premature withdrawal. In short, if you book an NRE fixed deposit, don't break it before completing one year. In this article, I'll share a couple of more important points about NRE fixed deposit which will help every Indian working overseas with their investment in NRI fixed deposits.




7 Things about NRE Fixed Deposits to Know (Benefits and Features)


1) You can open an NRE fixed deposits directly with banks without opening an NRE saving account, or you can open an NRE saving account and then open NRE FD using net banking facility offered by the bank. I prefer the second because it's more convenient, it also gives you full control in terms of visibility, management, and withdrawal, as you can break the NRE FD online as well. You can open NRE saving account with HDFC bank, ICICI, YES bank, Kotak Mahindra bank or SBI, if you are not sure which is the best bank to open NRE saving the account, check out this discussion.


2) The big advantage of investing money on NRE fixed deposit is that interest earned is completely tax-free in India, but you do need to pay tax on the country you are currently staying. So check your resident country tax law, if they charge tax on your global income or not. I know USA resident do need to pay tax on interest earned on NRE fixed deposit in India. See here to learn more about taxation on NRE fixed deposit.


3) Both NRE fixed deposit and NRE saving account are freely repatriable accounts, which means you can transfer both interest earned and principle amount to overseas without any prior approval or permission from RBI, which is the case with NRO account; where you need to take written approvals before sending money to overseas. Also, there is no upper limit on how much you can transfer abroad from NRE account in a financial year, as opposed to USD 1M from NRO account. See here to learn more about how to transfer money from NRI account to Overseas.


4) Now the most important point you should remember before opening an NRE fixed deposit, the minimum tenor for earning the interest on NRE Fixed Deposit is 1 year. No Interest will be paid if the NRE Deposit is prematurely withdrawn before 1 year.


5) The Interest on NRE term deposits is generally calculated as below:
  • If NRE Fixed Deposits is for the tenor < 6 months then only Simple Interest is paid
  • If NRE Fixed Deposits is for the tenor >= 6 months with Quarterly Interest Payout option: On a Quarterly basis
  • NRE Fixed Deposits for the tenor >= 6 months with Monthly Interest Payout option: Interest is calculated for the quarter and paid monthly at a discounted rate over the standard deposit rate
  • NRE Fixed Deposits for the tenor >= 6 months with Interest Reinvestment option: Cumulative Interest for the Quarter is added to the Principal in subsequent quarter and interest is calculated on total amount

Also, the paid interest amount (in the case of monthly/quarterly/half yearly payout mode) will be adjusted against Principal Balance of the fixed deposit in the case of Premature withdrawal of the NRE Deposit before 1 year. Again this rule is for HDFC bank and it can vary from bank to bank, so it's worth checking with the bank you want to place your NRE fixed deposit.


6) No Penalty will be levied on premature closure of NRE Fixed Deposit. Again this may vary from bank to bank e.g. HDFC bank doesn't levy any penalty but another bank might, so check with the bank you are opening NRE Fixed deposit about premature withdrawal penalty.

Nowadays, many banks like Kotak Mahindra Bank and ICICI bank has launched two types of fixed deposit, one which allows premature withdrawal and other which doesn't. So, make sure you open the right type of NRE fixed deposit, you might get some more interest if you opt for NRE fixed deposit without premature withdrawal option.


7) Generally, the Senior citizen gets preferential rates, more than 0.5 to 1% than what you get but most of the bank only give senior citizen rates are only for Resident Indians and do not apply to NRIs.



How to Compare NRE Fixed Deposit Rates Between Banks

The interest rate on NRE fixed deposit is lower than what it was a couple of years ago but it still a lot better if you compare with developed countries like the USA, Singapore or Australia. You will get around 7.75% interest rate with most of the banks e.g. HDFC bank but quarterly compounded, so the yield will be much better. ICICI and Kotak bank is offering a lower rate than HDFC at this moment and it seems Deutsche bank is offering the best and highest interest rate for his 5 years NRE fixed deposits. Do you own research as well because every basis point matter especially if you are doing NRE fixed deposit for long term and amount is quite big?


 There are also several websites which offer a comparison of NRE fixed deposit rates e.g. http://nridealexpert.com/, you can use their service to compare NRE fixed deposit rates before opening an account.

From the below snapshot which is last updated on Jan 2, still a month old, it seems Deutsche Bank if offering highest rate on NRE fixed deposit up to 8.75% and IndusInd and YES bank are second and third with slightly lower rates.

Compare NRE fixed deposit Interest Rates among Banks























That's all about 7 important things about NRE fixed deposit every NRI should know. In these points, we have covered benefits of NRE fixed deposits, features, advantages, disadvantages and some subtle but important terms and conditions imposed by banks e.g. no interest if you break your NRE fixed deposit within one year. In short, NRE fixed deposit is one of the best investment options for NRIs, it's safe, gives good interest rate around 8%, quarterly compounded and it's tax-free in India.

2 comments:

  1. Is there a limit, on how much total amount I can put in NRE FDs in ICICI bank? I think there is a limit of 10 Lakh for one 1 FD but if I have 11 FDs of 1 Lakh each, is it ok?

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    Replies
    1. @Jasmeet, there is no such limit for NRE fixed deposit. You can definitely create just one NRE FD of 10 lakh instead of creating 10 of 1 lakh each because its easier to manage and keep track of one FD than 10. Only advantage you get from 10 FD is that you can break them individually when you need money e.g. you need 1 lakh you can break one FD without affecting 9 others. It's important to remember that you won't get any interest on NRE fixed deposit if you break them before one year.

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