If you are an NRI and you are returning to India permanently, you will need to convert your non-resident accounts (NGOs, NREs) to resident accounts. You should be allowed to continue your NRE FDs until maturity as a resident FD at the contracted interest rate. However, if you visit the bank branch to change your residence status, you will be surprised.
What do banks typically force the return of NRIs for?
NRE account holders face major problems when attempting to reallocate their NRE term deposits into resident deposits. Banks typically ask customers to break their NRE FDs and reopen fixed-term deposits to residents. This can easily be attributed to a lack of knowledge.
By the way, the problem isn’t just limited to NRE accounts. Returning NRIs also have problems renaming NGO fixed-term deposits.
What’s the problem?
You face three big problems when you need to break your NRE FD
- You may have opened your NRE time deposit account at a higher rate. As a result, interest rates could have moved down. For example, you may have opened your NRE FD for 5 years at 9% pa After two years, if you break the NRE FD and open a new Resident FD, you can open a new FD at just 7% pa for 3 years at 2% interest to lose.
- Breaking (early withdrawal) of NRE FD may result in a penalty. In addition, you only receive interest for the period for which you maintained the fixed-term deposit. If we continue with the example above, let’s assume that the interest rate for a 2-year FD is 8.5% pa) If the bank imposes a penalty for early withdrawal, it can further reduce your income.
- NRE FD does not earn interest if you break the FD 1 year ago. Hence, you will not get anything in extreme scenarios where you have to take a break for 1 year ago.
Even if banks should allow you to continue your NRE-FD as a resident FD at the previously agreed rate, the banks do not allow you to do so.
Returning NRIs: What happens to your NRE, NRO and FCNR accounts?
Read: How can NRIs invest in mutual funds in India?
Someone decided to challenge the banks
Many investors do not enter the battle with the banking system believing that their efforts will not produce any results. Suren (name changed to hide identity), a regular reader of this blog, however, thought differently and took up the subject with the banks.
He had NRE FDs with 8 banks. He turned to all banks and referred them to Master Directions. He met with branch officials, dropped emails, dropped reminders, and was finally able to get his NRE FD as resident fixed-term deposits, meaning he didn’t have to break his NRE FD. At some banks, it took him up to 6 months to resolve the matter.
He was kind enough to share his experience in a comment and even shared his email communications with the banks with me. And he didn’t stop there. He also gave me permission to share his email so that others can benefit too.
In this post I will share his communication with the banks. I hid his email details for privacy. If you need his email id, you can email my support id. I will discuss with suras. If he agrees to share his email ID with you, I’ll share the details.
Suren had NRE FDs with the following 8 banks.
- State Bank of India
- Corporate bank
- Syndicate bank
- Bank of Baroda
- Canara Bank
- Karnataka Bank
- Axis bench
- Vijaya Bank
If you have NRE FDs with any of the above banks and the bank clerk does not allow you to rename NRE FD as a resident FD, you know what to do.
Also, if you have NRE FDs with other banks, you can escalate to the bank’s senior management and get it done. Note that the local branches may not know the rules. It may therefore be necessary to escalate this to management.
As Suren pointed out, “Some banks have poor coordination between head office and their branches and consider this a less important issue to pass on to their employees across the country.”
Thank you Suren for sharing your experience.
Excerpts from the communication with some banks
State Bank of India
On Mon, Oct 3, 2016 at 5:00 p.m., CANARA BANK
Dear Sir / Madam,
The ability to rename accounts, i.e. converting a non-resident Indian account to a resident account and vice versa, is not currently available in CBS and the same has been included as a change request by the provider.
Therefore, the system does not deduct TDS for NRE time deposits even though the customer category has been changed from NRI to Individual. The same must be done manually until the functionality is activated in CBS.
Out: [email protected]
We apologize again for the inconvenience on this matter and make this clear again
1. In accordance with RBI guidelines, we will convert NRE status to resident without changing the due date and interest rate on existing NRE term deposits.
- TDS will be deducted from converted NRE time deposits based on resident status with effect from the conversion date (not retrospectively).
We hope our answers are satisfactory.
Out: [email protected]
We apologize for any inconvenience this may cause you.
Regarding your concerns, we would like to respond as follows
- i) to continue to maintain NRE-FDs and thereby suffer penalties under FEMA law, * as long as they are mandated by FEMA to have their NRE-A / Cs reassigned by the banks as resident accounts immediately after their return to India * .
Answer: See RBI circular
NRE accounts, at the option of the account holder, should be renamed as rupee resident accounts or RFC accounts (if eligible) immediately upon the account holder’s return to India if the Authorized Merchant is satisfied that they are returning to India to take up employment is or for the pursuit of a business or calling or any other purpose with the intention of being in India for an uncertain period of time. If the account holder is only on a short visit to India, the account can continue to be treated as an NRE account while in that country. In the case of fixed-term deposits on NRE accounts, interest is payable at the originally set interest rate, provided that the deposit is held for the entire term even after it has been converted into a resident account.
The returning NRI can hold the NRE / FCNR deposit until maturity. With the exception of the provisions on the interest rate and reserve requirements for FCNR (B) deposits, for all other purposes, such deposits will be treated as resident deposits from the date the Account Owner returns to India. The customer can also convert any deposit into a resident deposit without changing interest rates.
With regard to the following email from the customer, please note the following:
1) For permanent return to India, the account holder’s existing NRE FD account must be converted to Domestic FD A / c. without changing the maturity pattern. The interest rate stays the same.
2) Applicable TDS will be collected by the system as soon as the branch has transferred the account from the NRE sub-unit to the domestic sub-unit.
Interesting case at the Bank of Baroda
At the Bank of Baroda, the bank confirmed that Suren was right. However, it did mention that its technical systems did not support such a switch (renaming) and that the matter was being handled with the team’s technical staff. Then the changes were made.
In fact, it has made changes to the website for facilities available to returning Indians (as told by Suren).
You can check the returning Indian webpage on the Bank of Baroda website where it NOW clearly states that you can continue NRE FD as Resident FDs at an agreed rate.
You see what regulatory knowledge paired with perseverance can achieve.
What about the tax treatment of such fixed-term deposits?
Since your NRE FDs have become Resident FDs, the interest is no longer tax-free and you have to pay. The interest income is taxable and may even be subject to TDS (tax at source).
In any event, if you are no longer a FEMA resident, the interest on the NRE account will also be taxable. Section 10 of the Income Tax Act exempts interest income from NRE accounts / deposits only for non-residents in accordance with FEMA. By the way, the definition of NRI according to FEMA and Income Tax Act is different.
Interest on NGO deposits is also taxable for NRIs. So nothing changes in terms of taxation.
a book: In the wonderland of investing for NRIs by ANShanbhag / Sandeep Shanbhag