FAQs on NRE deposits

Check out my introduction to NRE Deposits for additional information/links

1. People tell me that the US$ might cross Rs 55 in the next 3-6 months. Should I wait?
   • Needless to say – exchange rates depend on various factors, and it’s hard to accurately predict the future exchange rates
   • Assuming a 9% pa interest, Rs 53 will become Rs 54.2 (before taxes) in 3 months.
   • It’s your call on whether you want a guaranteed increase of Rs 2.2 (pre-tax) vs a possible increase of Rs 3+
   • Do a similar calculation if you are expecting to see a bigger change in the exchange rate
   • As I've mentioned in my introduction, exchange rate variations are the biggest risk to these FDs
2. Should I go with cumulative NRE FDs (i.e. interest get compounded)  or with standard NRE FDs (i.e. interest get paid out monthly/quarterly)
   • Factors to consider include – do you prefer keeping the interest income in INR or in US$ (consider exchange rate risks), your current vs future tax bracket
3. What time-period would you recommend, for the NRE FD?
   • Depends on your situation. With some banks (e.g. SBI) the penalty for early-withdrawal is a reduction of interest by 0.5% p.a. (which isn’t too bad)
4. How do the NRE FDs compare with the tax-free infrastructure bonds?
   • Currently, NRE FDs offer a higher interest rate (9.25% vs 8.5%)
   • Money kept in NRE FDs are easier to repatriate
   • Maximum time period of NRE FDs is 10 years, whereas some of the infrastructure bonds are for 15 years
   • Bonds can be traded before the time-period ends
   • Bonds could be sold for a premium, if interest rates decrease at a later point
   • Check out a discussion on this topic here
   • If your tax status changes to resident, you may be liable to pay Indian Income tax on the income generated from NRE deposits.
   
   

If you have additional questions, please leave a comment & I will try to respond to it.