How to make the most out of the NRO FD account?

As per the RBI (Reserve Bank of India) Regulations, an NRI (Non-Resident Indian) can open three types of FDs in India – NRE FDs, NRO FDs and FCNR (B) deposits. These three types of deposits carry their respective benefits and restrictions and are suitable for different NRI investment requirements. Of the above, NRO accounts carry several benefits for the NRI account holders in terms of flexibility regarding funding and tenor of such deposits. Here is how you can make the most for your investment needs with NRO FDs:

1. 1. Funding – Such deposits are most flexible in respect of funding, and one can fund such deposits through money transfers from any bank account within India or outside India. When the residential status changes to NRI, any existing bank deposits held by the individual are also converted into NRO accounts by default. 

• Insulated from Forex Movements – NRO deposits are denominated in Indian currency. As such, forex rate movements do not impact such deposits. 

• Flexibility in Tenor – NRE deposits must be opened for a minimum tenor of 1 year. If withdrawn prematurely before such period, the bank cannot pay any interest on such deposits withdrawn prematurely. However, such a minimum period for NRO deposits is only seven days. This makes it easier for the NRIs to make the most of the savings in India without compromising with liquidity. 

• Interest Rates on NRO deposits – The interest rate on NRI deposits, including NRO deposits, have been deregulated by the RBI. Banks are free to set the interest rate on such deposits as per their tenor. 

• Repatriability of Interest Income – While the amount invested in NRO FDs is subject to repatriation restrictions under the RBI Regulations, the interest income is freely repatriable. The interest income can be transferred outside India without any restrictions. Further, the limit for principal amount is currently USD 1 million per year. 

1. Operational Flexibility – NRO deposits are also flexible in terms of joint holding. Such deposits can be held jointly with another NRI or resident Indian, and there is no restriction in this regard. Further, the deposit holder can also appoint any resident Indian or NRI as the nominee to such deposits in case of life contingencies. Such deposits can, thus, be used for investment purposes within India with an operational mandate to the family staying in India. 
2. Insured under Deposit Insurance – NRO deposits are covered under the Deposit Insurance coverage up to Rs. 5 lakhs per customer. As such, in case something happens with the bank, including any moratorium imposed by the RBI, the deposits are repaid out of such deposit insurance up to the amount of Rs. 5 lakh. 
3. Taxation of Interest Income – While the interest income on NRE FD is exempt, the account holders must note that the interest income from NRO FDs is taxable. One must pay income tax on such income as per the applicable tax rates. However, one can avail benefits of the provisions of Double Taxation Avoidance Agreements (DTAAs) on such interest income to avoid double taxation of similar income in different countries.

Given the above benefits and flexibilities embedded within the framework for NRO FDs, one can enjoy attractive interest rates on such deposits while enjoying relative liquidity with such deposits. NRO FDs can be one of the suitable investment options for the NRIs looking to invest their money in the homeland. 

The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules, as tax benefits are subject to changes due to change in tax laws.