You might have read in the papers lately, about how NRIs are sending money to India, to be invested by relatives on their behalf.
The reason: RBI has capped interest rates on non-resident deposits.
According to the numbers released by RBI during April-June 2007, NRI deposits saw a net withdrawal of USD 447 million compared to an inflow of USD 1.2 billion during the same period last year. On the other hand, remittances to family and relatives amounted to a whopping USD 8.3 billion.
It is felt that such vast inflows coming in as remittances are used by relatives to invest in assets such as bank deposits, stocks and real estate in the local markets. The NRIs send money to their relatives instead of investing directly on account of the fact that RBI has capped the interest rate payable to NRIs twice this year. So, sending remittances to relatives is a way of bypassing this cap.
Bad strategy?
However, there is something intrinsically wrong with this strategy. Perhaps it is on account of a lack of complete information on the part of NRIs.
Yes, RBI has indeed capped interest rates twice --- however, it is only for interest on NRE and FCNR accounts. Interest on NRO accounts (which is the counterpart of a Resident Fixed Deposit) is not capped.
So, it would hardly make any difference whether the NRI invests himself or sends the money to a relative to invest on his behalf.
The real picture
For example, the interest on an NRE FD ranges from 4.64% to 4.90% -- this is hardly enough to beat inflation. However, 9.50% per annum interest is available on an NRO FD. This is the same, as a Resident Indian would get if he were to invest his money.
So, where is the need to send money to relatives for investment purposes? NRIs can do it themselves in their own name.
Take other asset classes ie secondary market investments, mutual funds and real estate. Here too, NRIs can directly invest their money on a fully repatriable basis.
And what’s more, for most NRIs, the rupee is fully convertible, because as much as $ 1 million can be remitted from the NRO account, which hitherto was considered as a non-repatriable account.
Is it wise to send money?
On the other hand, there are certain risks associated with sending money to relatives for investment.
1. The NRI will lose entitlement to his funds. The money once sent to your relative, now legally belongs to him.
2. What you and me understand by the term ‘relative’ may not apply in the case of Income Tax.
The Income Tax Act specifies watertight definitions of the term ‘relative’ and if the person to whom money is being sent doesn’t qualify as per the Tax Act, all the funds remitted could be taxable for the recipient. So, one has to be very careful about the tax impact.
3. Post Office instruments such as POMIS, NSC, PPF etc, are not available to NRIs. However, since interest rates have moved up in the economy, these instruments have lost their erstwhile allure.
The highest rate you can get with the post office investments is 8%, which is even lower than a simple NRO deposit. Mutual funds of course have provided returns in high double digits.
Finally, all NRIs must know that restrictions apply only to NRE and FCNR Fixed Deposits.
But they are free to invest in other asset classes mentioned above without fear of repatriation or taxability.
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