I have been receiving lot of inquiries whether to transfer, when to transfer, whether to break NRO FD to transfer funds out of NRO to NRE accounts and many more.
My answer has been and is always going to be Break FD and Transfer funds AS SOON AS POSSIBLE provided total cost of premature withdrawal is less than the present value of future benefits (including tax saving) from NRE FD.
Factors such as term of FD, amount, maturity date, premature penalty, effective tax rate, interest differential, expected interest rate movements, whether filing return in India, what you plan to do with your funds, etc. are very much important and should be considered before making any decision.
For most of the NRIs, Income Tax on interest of NRO savings or FD account materially affects their after-tax return. If you are a long term investor, effective income tax rate is very high compared to nominal tax rate. The compounding of income tax makes effect greater than the tax rate. The effect is known as TAX DRAG. It means reduction of potential income due to taxes.
If you invest Rs. 100,000 which generates 10% return every year and if tax rate is 30.9%*, your tax drag in 5 years, 10 years and 20 years would be 35.03%, 40.35% and 51.02% (i.e. you pay more tax than your after-tax gain) respectively.
Shocked? See below for the calculation:
| Investment 100,000; Return 10%; Tax 30.90% | ||||||
| Year | Value Tax=0 | Value After-Tax | Gain at Tax=0 | After-tax Gain | Gain lost due to Tax | Tax Drag |
| 1 | 110,000 | 106,910 | 10,000 | 6,910 | 3,090 | 30.90% |
| 2 | 121,000 | 114,297 | 21,000 | 14,297 | 6,703 | 31.92% |
| 5 | 161,051 | 139,666 | 61,051 | 39,666 | 21,385 | 35.03% |
| 10 | 259,374 | 195,067 | 159,374 | 95,067 | 64,307 | 40.35% |
| 20 | 672,750 | 380,510 | 572,750 | 280,510 | 292,240 | 51.02% |
If your investment generates 15% return every year, your tax drag for 10 years and 20 years would increase to 44.80% and 59.73% respectively.
| Investment 100,000; Return 15%; Tax 30.90% | ||||||
| 10 | 404,556 | 268,110 | 304,556 | 168,110 | 136,445 | 44.80% |
| 20 | 1,636,654 | 718,832 | 1,536,654 | 618,832 | 917,822 | 59.73% |
* Finance Act 2012 requires Tax Residency Certificate (TRC) for lower TDS rates as per DTAA. If NRIs are not able to obtain TRC from the Government of their resident countries, tax will be deducted at 30.9% from April 1, 2012. I would assume that TDS will be deducted @ 30.9% and not DTAA rate of 10%-15% for most of NRIs from April 1, 2012.
While there are other advantages of transfer from NRO to NRE as noted in my blog at http://nareshco.com/blog/?p=8, the key reason for my recommendation is “Tax Drag”. Understanding tax drag is extremely important especially if you are in the highest tax bracket. Unfortunately, the concept is not known or understood by majority of bank employees, financial advisors or Chartered Accountants.
Please also review “Procedures for transferring funds from NRO to NRE”.
7 Responses
Dear Jigar
I have seen ur posts and find these extremly useful & informative. I have a NRO FD which will mature in June 2014. I have read in your post that now RBI permits funds transfer from NRO to NRE account. I have no other income except from intrest in India. If I want to transfer FD proceeds to NRE account, would it be subject to 30% tax or actual payable tax as per laws for Indian citizens in India. My intrest income from all sources including NRO FD, NRO savings account etc. would be about Rs. 3 lacs.
Would you advise breaking FD now or let it mature, I claim back TDS in my return for FY 2013-14 and then transfer funds from NRO to NRE account. My basic concern is while converting from NRO to NRE is there any deduction made by bank under Income Tax laws. Somebody told me they will deduct 30% as tax, though I am not convinced about it as I have not read any such thing any where. Pl. guide.
i want to repatriate money from my ICICI NRO account to my local account at Muscat. Whats the % of TDS involved?
No TDS. It is your money, which is after TDS so no additional tax needs to be deducted. Thanks.
Can I transfer money from my dad’s general saving account to my NRO account? I have 2 bank accounts in 2 different banks (both NRO) but 1 of the bank allows internet banking for me to transfer money from my dad’s saving account to my NRO account but other doesn’t. Pl. guide
You would need to define the nature of transfer whether gift, loan or any other. Once you know, transfer from any account is just a mode of transfer. Thanks.
Hello Jigar,
I have recently re-located to U.S. My money earnt in India so far is currently in a savings account. I have asked my bank to convert my savings account into a NRO account and i have also submitted an application to open a new NRE account.
As the FD interest rates are same for NRO and NRE accounts , Should i transfer my money in NRO account to NRE account or FD it in my NRO account itself. Please advise.
Regards,
Sudheer
Definitely. As soon as possible. Thanks.