NRIs have long favored NRE Deposits as a means to save their excess funds. On paper, it seems like they offer certain features that seem to make them attractive for NRIs. But let’s dig a little deeper to see if NRE accounts are actually beneficial to US-based NRIs.
Deposit Accounts
As of March 2020, most NRE 1-year deposits were offering around 6.5%. One gets an interest rate around 1.8-2% from a one year CD at certain banks. Many NRIs view this higher rate offered by the Indian NRE deposits to be attractive.
But the fact is, the 6.5% offered is in INR, and the higher rate only compensates for the higher inflation in INR. For instance, the interest rate in Argentina is 40% and in Uzbekistan, it is 16%. This does not mean that the Argentinian bank deposit is an attractive investment opportunity.
The higher inflation erodes the value of INR and this leads to its depreciation against a currency with lower inflation such as the US dollar.
Source: Investing.com
The Rupee has been continuously depreciating, and it has depreciated by an average of 4.5% annually in the last decade, which in this case aptly is more or less the differential in interest rates offered in USD & INR.
Let us take an example to understand this scenario better. Say you want to invest $ 10,000 in a bank deposit today.
Option 1- US Bank CD rate at 2%
Invest $10,000
Value of your savings at the end of the year- $10,200
Option 2- India NRE FD rate at 6.5%
In this case, you will first need to convert your 10,000 USD into INR, where you will incur a cost of 1-2%. Assuming the current interbank exchange rate to 74, one can expect to receive about 730,000 INR after transaction charges. This will be worth 777,450 INR by the end of the year, based on the 6.5% interest rate. Let us assume that the Rupee would depreciate at 4.5%, the average depreciation rate over the last decade. Therefore, the Rupee would be trading at 77.33 at the end of the year and the value of your savings would be worth $10,053.
Of course, we don’t have a clue about what the actual Rupee exchange rate is going to be at the end of the year. Rupee could depreciate more than 4.5% or less than that. But when we invest in a bank deposit, we are looking for stability and not speculate on the exchange rate.
Savings Account
In the case of a savings account, the point we made in the case of deposit accounts only gets more weight as the interest rate differential between INR & USD is in the 1-2% range. One gets anywhere between 3-4% in INR and about 1.8% in USD in the case of savings accounts.
The Myth that NRE Interest is tax-free
In many NRE promotional material, it would be prominently mentioned that the NRE interest is tax-free in India. Yes, indeed, one doesn’t have to pay tax in India, but you will have to pay the taxes in the US. So, there is isn’t really any tax benefit in investing in NRE deposits.
Other factors to Consider
Forex Charges
As mentioned earlier, one needs to incur forex transaction charges every time you convert your USD to INR. If you need to repatriate this money back to the US for some reason, you will incur another leg of forex charges, causing a double whammy. This could add up to a total of 2-4%.
Insurance
Insurance coverage is a critical factor to consider before depositing money with Banks. In India, your deposit is insured to the extent of 500,000 INR (~$6,700), but the same for a deposit in a US bank is $250,000. For most practical purposes, a limit of $250,000 would be good enough for most investors.
Hassle
Then there is the ease of opening an account. As a US-based NRI, it will be a straight forward process to open a deposit or savings account. Many companies nowadays offer an utterly seamless account opening experience. The same cannot be said about the process of opening an NRE account.
Speculative Nature
Of course, there would be times when investing in NRE deposits would have turned out to be more beneficial, and this depends on how the Rupee moves with respect to the Dollar. This is suitable for people who are willing to speculate on the USD/INR rate. But for the average person who is looking to save, it may not be an appropriate strategy.
NRIs should take into account all these above factors before choosing to save in an NRE deposit and understand the reason behind why Indian banks offer a high-interest rate on NRE deposits. There is no such thing as a free lunch so much so in financial services.
NRIs have always wanted to invest a part of their savings in India, be it in real estate or bank deposits. Recently, there has also been an increasing interest amongst NRIs to invest in mutual funds. But many of them fail to consider opportunities to make that same investment through alternatives such as US-listed exchange-traded … Read moreInvestment Comparison for NRIs : US-listed India ETFs vs MFs in India
Many NRIs find it essential to maintain exposure to the Indian financial markets. Whether they intend to return or have financially dependent family there, investments in India allow them to diversify their portfolio as well as support current or future rupee-denominated expenses. However, there are a couple of ways that NRIs can access the … Read moreInvest in India via ETFs: An Efficient Alternative for NRIs
Investing in the stock market was never meant to be easy. The act of buying and selling a stock is the only aspect of investing that does not require any skill. But ironically, a lot of money and effort has gone into making this process easier and seamless. Every other aspect of investing needs years … Read moreWhy Retail Investors have no business buying Individual Stocks
All NRIs living in the US will be familiar with the Social Security program as one of the primary sources of retirement income. Social Security is a US federal government program that employers and workers fund with current income in the expectation of receiving future income from the government upon retirement, disability or death. Depending … Read moreAre NRIs eligible for Social Security benefits?
Indians have always revered education as a means of financial independence, social mobility, and generational wealth. To many Indian parents, educating their children is also considered a moral duty, one which they are willing to make through hard work, savings, and sacrifice. Today, both Indians and NRIs spend hours strategizing how to get their children … Read moreHow should NRIs plan for their Children’s Education?
Whatever your age or financial situation, it’s never too early to start saving for retirement. For NRIs residing in the US, investing through an Individual Retirement Account (IRA) will save on taxes while providing access to a range of investments. IRAs are retirement accounts for those earning US taxable compensation and younger than 70½ years of … Read moreAre IRAs suitable for US-based NRIs?
US-based, India focused exchange traded funds, or ETFs, are low-cost investment vehicles that allow NRIs to gain exposure to the Indian stock market while maintaining liquidity and diversification. An ETF is a basket of stocks that mirrors the holdings of an underlying index such as the S&P CNX Nifty. ETFs have two significant benefits … Read moreTop Five India Focused ETFs for NRIs
Indian resident or NRI: No matter where you live in the world, a portion of your investment should be allocated to US equities. The case for investing in US stocks only gets stronger if you are a US-based NRI. As the largest market in the world, the US stock market provides a stable, liquid investment … Read moreWhy Investing in US Stocks is Essential for NRIs?
Having a place to call home or investment property is a dream for many. The appeal of real estate as an investment is universal. Real estate, like other physical assets, is easier to understand than stocks, funds, or other “paper” investments and is seen as a safe investment. Although those are common perceptions, real estate … Read moreThe Risk & Reward of investing in US Real Estate for NRIs
NRIs have long favored NRE Deposits as a means to save their excess funds. On paper, it seems like they offer certain features that seem to make them attractive for NRIs. But let’s dig a little deeper to see if NRE accounts are actually beneficial to US-based NRIs.
