Non-Resident External or NRE Account can be a Savings, Recurring or Fixed Deposit Account where NRIs can deposit their foreign currencies which gets remitted to an Indian Account. An NRE account is held in Indian Rupees and is completely tax-free.

Benefits of NRE FD Account:

An NRE FD Account holder has the following benefits :

• Both principal and interest earned are tax-free in India
• Principal and interest earned are freely repatriable to account holder’s country of residence
• High-Interest Rate
• Can be opened jointly with other Non-Resident Indian(s)
• Offers flexible tenures that may range from 1 year to 10 year.

High interest rates on NRI FD:​

For 1 year to less than 2 years FD, the interest rate range between 6.00% to 7.75% depending on the bank. For 3 year to less than 5 years FD, the interest rate range between 6.00% to 7.50%. While the interest rate range between 6.00% to 7.25% for 5 years to 10 years FD. Though rate changes slightly depending upon the bank.

Small Finance Banks offer even higher FD Rates:

Indian government has licensed some companies to operate as Small Finance Banks. Though not a scheduled commercial bank, these Small Finance Banks are very niche in operations. Fixed deposit is one of the services offered by Small Finance Banks. Some of these Small Finance Banks offer high interest rate of 8.00% to 8.75% for different tenors on NRI FD’s.

Debt Mutual Funds:

Debt funds are the closest which comes to the conventional FD’s in terms of risk – return. A debt fund’s main goal is to give investors steady income throughout the investment horizon. 

For the NRI investors in debt funds, Short Term Capital Gains are taxable at the rate of 30%. Holding the fund for more than three years will result in 20% tax on the gains with indexation benefit. LTCG on non-listed funds will be taxed at 10% without indexation.

Many debt mutual funds invest in a mix of bank deposits, corporate bonds and government securities. Due to on-going liquidity crisis in the NBFC industry, many corporate bonds are facing defaults. This is resulting in decline in NAV’s of many debt funds. Hence, in the present scenario, the risk associated with debt mutual funds is medium-high.

Comparison

Let’s have a look at the comparison between NRI fixed deposits and debt mutual funds. The table below helps us to decide which investment is better for NRI investor. 

Conclusion:

For debt asset allocation, NRI investor will be better off choosing NRE (non-resident external rupee account) FD deposits given their tax free status and higher interest rates prevailing now and low risk associated with NRI- FD.