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Important RBI changes announced on August 14, 2013 – Time for NRIs to celebrate Independence Day with a Bang

 Category Important Update Analyzed, Investments, NRI / OCI, Taxation
August 16, 2013
On August 14, 2013, RBI made 5 important changes to address the depreciating rupee. Whenever RBI takes such measures, NRIs are sure to benefit.
Two changes are aimed at attracting foreign exchange from NRIs in long term NRE or FCNR bank deposits and other three are related to preserving the foreign exchange by restricting access of foreign exchange to residents.
As a result of these changes, NRIs stand to get higher TAX FREE interest on NRE and FCNR deposits of 3 years and above, even higher than resident Indians. For NRIs, this offer a unique opportunity to transfer more foreign currency at historically higher foreign exchange rates – Rs. 61 / USD, Rs. 96 / GBP etc and earn higher interest.
All 5 changes are explained and analyzed as follows:
1.     Deregulation of Interest Rates on Non-Resident External (NRE) Deposits:
While RBI deregulated the interest on NRE deposits on December 16, 2011, there was a condition that the interest rate on NRE FDs cannot be higher than those offered by them (banks)  on comparable domestic rupee deposits.
However, on August 14, 2013, RBI gave freedom to the banks to offer interest rates on NRE deposits with  maturity of 3 years and above without any ceiling.
It means that NRE FD rates for deposits of 3 or more years CAN BE HIGHER than the Rupee deposits given to residents. This is applicable to NRE deposits only. The extant ceiling on NRO Accounts shall continue and interest rate on NRO deposits cannot be higher than those offered by banks on comparable domestic rupee deposits.
It is Important to note that the deregulation of NRE deposits will be valid up to November 30, 2013 only, subject to review.
 
2.     Interest Rates on FCNR(B) Deposits:
Interest rates on Foreign Currency Non Resident (FCNR) Deposits on various currencies for maturity of 3-5 years are increased by 1%. The revised ceiling on FCNR deposits are as under:

Period Existing Revised
1 – 3 years LIBOR/Swap+200 bps (2%) No change
3 – 5 years LIBOR/Swap+300 bps (3%) LIBOR/SWAP+400 bps (4%)

It is Important to note that the increased limit on FCNR deposits will also be valid up to November 30, 2013 only, subject to review.
 
3.     Limit on Liberalized Remittance Scheme (LRS) for Resident Individuals Reduced to USD 75,000:
Resident Individual was allowed to remit upto USD 200,000 per financial year (April – March) outside India for any permitted purposes. RBI reduced the limit of USD 200,000 per financial year to USD 75,000 per financial year with immediate effect. As a result, remittances of up to USD 75,000 can only be made for any permitted current or capital account transaction or a combination of both per year.
Accordingly, the limit of Gift or Loan to NRI close relatives by resident individuals is also reduced to USD 75,000 per financial year. So now, resident individuals can only give gift upto USD 75,000 to their NRI close relatives.
Within this limit, resident individuals are allowed to set up Joint Ventures or Wholly Owned Subsidiaries for bonafide business activities outside India. It was also mentioned that the scheme should not be used for making remittances for any prohibited or illegal activities such as margin trading, lottery etc.
 
4.     Restriction on Acquisition of Immovable Property Abroad by Residents
In addition to reducing the limit under LRS, RBI has restricted the acquisition of immovable property, directly or indirectly, outside India by resident individuals. No remittances can be made under the Liberalized Remittance Scheme (LRS) Scheme for acquisition of immovable property outside India.
 
5.     Reduction of limit for Overseas Direct Investment (ODI) to 100% of Net Worth
An Indian party was allowed to invest in Joint Ventures (JV) or Wholly Owned Subsidiaries (WOS) as Overseas Direct Investment for any bonafide business activity upto 400% of the net worth of the Indian Party as on the date of the last audited balance sheet under the Automatic Route.
The limit was reduced from 400% to 100% of the net worth of the Indian Party under the Automatic Route as on the date of the last audited balance sheet. And, any ODI in excess of 100% of the net worth shall be considered under the Approval Route by the Reserve Bank of India.

 Tags Bank, currency, FCNR, FD, FEMA, Financial Account, financial institution, foreign exchange, Income Tax, India, Investment, IRS, Liberalized Remittance Scheme, LRS, NRE, NRI, NRI Investment, NRO, OCI, PIO, RBI, Tax
18 Comments:
Vinod
September 2, 2013
Reply

This is really informative. I have a question – given the conversion rate right now, would you advise taking an equity line of credit in US and using that money to invest in Indian NRE FD for one year? Not a big fan on 1 year + FD. Obviously the interest rate offered on NRE FD is very attractive compared to interest that I would pay for Equity line of credit. What are the other things (tax rate on interest earned payable in US, ease of repatriation etc) that one need to consider?
I am not a savvy investor but with all the buzz that I am hearing, I am curios and tempted to go down this path. Really appreciate your insights.
Cheers!

Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)
September 3, 2013
Reply

It all depends on the rate of interest on line of credit in USA, interest on NRE FD, amount of deposit, your marginal tax rate in USA, forward INR/USD rate, etc.

sarabjot singh flora
September 11, 2013
Reply

Sir,,
please advice 2 years back only I got my NRE funds transfer to NRO since then interest rate was much less as compare to NRE interest but later it was revised and at the same time I am liable to pay tax kindly advise if I can transfer NRO Fixed deposits to NRE deposits.
regards

Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)
February 1, 2014
Reply

RBI has allowed transfer of funds from NRO to NRE. Please check my other blogs on this subject and whether transfer, why transfer and how to transfer. Thanks.

vj
September 15, 2013
Reply

Hi:
Vinod asked a question that is pertinent to all NRI- Should I invest in a higher interest earning NRE (9%) while borrowing in US (4%) – delta of 5%?
Without looking at any calculation , I would do not invest in India because inflation
(US-3%, India-8%) – delta of 5% eats away that gain in interest. I have not included exchange and differential income tax impact for a simpler assessment.
However, for detailed assessment, does any one have a worksheet that captures inflation, income tax, exchange effects?
Thanks
vj

Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)
September 16, 2013
Reply

My view would be, Inflation matters only if you are living in India. If you are living in the USA, inflation in India does not affect your real return. So you would only consider the nominal return. However, as you would be investing in INR, foreign exchange, and currency depreciation would be important.
Comparing 1.5% in USA for 5 year FD with 5.5% FD rate is due to the credit risk of India. If you think India won’t default in 5 years, you should invest in FCNR. Also, the NRE FD (in INR) of same maturity gives you about 9.5% return. Here, depreciation of INR comes into picture. The rate assumes that INR will depreciate @ 4% annually. If you think that INR will appreciate or will depreciate less than 4% per year, invest in NRE FD (INR) and if you think INR will depreciate more than 4%, invest in FCNR FD (USD).

Subramanian M
February 22, 2014
Reply

I request a clarification on the taxability of the interest on NRE deposit post return to India under the following situation:
I am planning to return to India after 11 years of stay in Middle east but I have no intention of taking employment or doing business or profession. I will be staying for more than 182 days at singapore and US with my daughter under visit visa. I have no intention to stay in India for a uncertain period. But from AY 2016-17 I would be staying for more than 60 days india and in the last four years preceding the AY 16-17 I would have stayed for 365 days plus in India. Technically I may become a resident in India. My reading of Section 10(4) provides exemption on Interest income from NRE deposit based on the definition of person resident outside India under FEMA and Under FEMA I may be technically a person resident out side India. Whether the Interest income from NRE deposit would still be exempted. Your advise would be very much appreciated.
Thanks

Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)
February 24, 2014
Reply

1. NRI investment is governed by FEMA and NRI taxation is governed by the Income Tax act.
2. Whether you are allowed to hold/invest in NRE FD, you have to refer the definition of “Resident” per FEMA. If you have no intention to settle in the India for uncertain period, you are not resident under FEMA and as a non-resident under FEMA, you are allowed to invest in NRE FD.
3. As per income tax act, interest on NRE accounts owned/invested under FEMA rules is exempt from Income Tax in India.
In your case, based on the limited information, I am of the opinion that the NRE interest would be exempt from Income tax, provided you are a non-resident under FEMA. Thanks.

dinesh kumar
July 31, 2014
Reply

I would appreciate if you would tell me in detail how to
transfer funds from nro account to nre account Thanks please provide your contact info too.

Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)
July 31, 2014
Reply

Please search on the blog for “NRO to NRE transfer” category and read blogs and comments to know. The contact information is in “Contact Us”. Thanks.

Neeta Joshi
October 15, 2014
Reply

Can you please help me understand if married sister, not financially dependent on me for living will be considered close relative for the purpose of tax-free gifts upto 5Lac INR limit?

Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)
October 15, 2014
Reply

Brother-sister are close relatives. It does not matter whether she is married or whether she is financial dependent. Also, there is no limit of gift as per Indian laws. Thanks.

Rujoy
March 11, 2016
Reply

My parents in India want to gift me some money. Can they deposit this money directly into my NRO/NRE account? Also what is the requirement (certificates, etc) and limit for such gifts?

Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)
March 12, 2016
Reply

A resident can give upto $250,000 per year to his/her close relative (siblings, parents and kids) every year. So in your case your father can gift $250k and your mother can give gift of $250k. If first gift can be completed in March, (before march 31 i.e. year end), they may give same amount in April too as the limit is per financial year. Thanks. You can deposit the money directly to NRO account. If you want the money in your foreign bank account or NRE, CA certificate may be required. Thanks.

t.g.shashidhara
May 5, 2016
Reply

kindly let me know whether I can gift a Carpet to my son on his birthday. The cost of carpet may be around Rs.25000/- whether I can carry along with my luggage. If so, any custom duty is payable? kindly clarify whether there is any exemption. the limit available etc.,
regards
shashidhar

Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)
May 14, 2016
Reply

1. Yes. you can gift the carpet to your son.
2. I am not sure of the custom duty as it will apply based on the country you fly to. However, I don’t think there would be any but please check the custom duty of the country where your your son reside.

Gokul
March 7, 2017
Reply

How do regulators (Sebi, Rbi and Income Tax Authorities) exempt tax on gifts?
(Is it through a notification, rule, statutory act, etc.?)

Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)
April 10, 2017
Reply

SEBI regulates securities market, RBI regulates forex, money and transactions with NRIs and Income Tax regulates taxation. The Gift tax was abolished in India. However, it is now included in the Income Tax Act. So for taxability of any gift (transfer of money or asset without adequate consideration), you would only refer provisions of Income Tax act. Thanks.

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