Hike in NRO Term Deposits: Time to Take Advantage

Hike in NRO Term Deposits: Time to Take Advantage

These are best times for the non-resident Indians who have placed or are keen to park their money in ordinary Non-Resident Rupee (NRO) accounts in Indian banks as interest rates have gone up significantly in last few months. It is now at least 9% for over 500 days term deposits in most of the banks and therefore the new entrants as well as the old account holders need to ponder over the change in interest rate structure that slightly varies slightly from bank to bank. On the other hand interest rates for Non Resident (External) Rupee (NRE) and Foreign Currency Non Resident (FCNR) accounts are around 2.5% for two year term. NRE and FCNR accounts are tax free but the tax is deducted at source on the interest earned on NRO accounts. For example, in case of NRO deposits tax is levied at 30.90% for the interest earned up to INR one million in a year.

Just last January, interest on NRO used to be around 7% or less. “Those who have parked their money for less interest should consider pre-mature closing of their term deposits and open new deposits to take advantage immediately”, says a banking official pointing out that now more banks may start imposing the penalty if the money is withdrawn before completion of the maturity period. Banks are being compelled to take such a step to minimize any impact on their liquidity position at a time when rising interest rates are pushing up the cost of funds for them.

At present many banks – mostly those in private sector - do not impose any penalty to lure the customers. Some pay interest rate applicable for the period for which the deposits have been maintained while some already have mechanism in place to penalize early withdrawals in a small way. The investors who want to take advantage of continuous rise in interest rates over recent months should calculate the actual gain in case their bank imposes penalty on premature withdrawal. In most cases recalculations should work-out in favor of customers. Moreover, for online users it is hassle free and just takes a few minutes to get out of their existing term deposits and reinvest.

Gopal Sutar