Should I choose NRE or NRO fixed deposit?

I want to transfer ₹2 crore from my NRI (non-resident Indian) account in ICICI Bank to my residence country abroad and then transfer again this amount in dollars to ICICI Bank in India in my NRE (non-resident external) account in which no TDS (tax deducted at source) and income tax applies on interest, keeping in mind the bank charges and currency conversion charges. Or, should I invest this money in domestic fixed deposits (FDs) in ICICI Bank which will attract TDS and income tax on the interest earned? Please note that the interest rates in both type of deposits are the same.

—Name withheld on request

Your query presupposes that you are a NRI and thus, by reference to the term ‘NRI account’, I am making the assumption that you are referring to NRO (non-resident ordinary) savings account, whereas by reference to the term—‘domestic FDs’, I am making the assumption that you are referring to NRO (non-resident ordinary) FDs.

Under the first scenario, in order to place money in NRE (non-resident external) FD, it is not necessary for you to route the funds through outwards remittance from NRO savings account to your foreign bank account and subsequent inward remittance to place the NRE FD. You may simply transfer money in India from NRO savings account to place a fixed deposit directly in NRE FD. This fund transfer from NRO savings account to NRE FD would be permitted under the $1 million scheme which is available to NRIs per financial year.

Thus, the first scenario does not have to involve foreign remittance and this way, you can avoid the bank charges as well as currency conversion charges.

Though the fixed deposit rates offered by many banks are similar between NRO FD and NRE FD for comparable tenure, the minimum tenure for NRE fixed deposits is one year, whereas for NRO fixed deposits it is a mere seven days. Further, the maturity amount from NRE FD is fully repatriable outside India whereas NRO FD maturity proceeds are permitted to be repatriated upto $1 million. Also, as you have mentioned in your query, NRE FD interest is exempt from tax whereas NRO FD interest is chargeable to tax.

Harshal Bhuta is partner at P.R. Bhuta & Co. Chartered Accountants.