NRO Fixed Deposits

[pskum]

Hi,

Apparently NRO fixed Deposits are currently giving 9% yield (1 year).
1.Can we fund NRO deposits fully from outside of country?
2.There would be tax deduction (TDS) on interest in India. I assume they would also send 1099-INT.
a)Is there a way to stop TDS as income would be less than tax exemption limit?
b)If we pay tax through TDS, I assume we can take foriegn tax credit while submitting US returns. Or should we go through double taxation?? If US gives credit, then i would prefer paying taxes to India than to US.
c) Is it good idea to put money in NRO fixed deposits. Even with tax implications, 9% returns are veery attractive given that we are just getting 1% in US. There is a risk of fx ratte exposure but it seems rupee is almost pegged to dollor..

Please share your thoughts.

thanks
kumar.

[Imissindia]

1.NRO deposits give a yield of about 10.5 to 11.5 % if opened for more than one year. Most banks have a 9.25% for 2-3 year period.The 9% you refer to is APR. Indian banks are not allowed to advertise APY yields like it is done in the US.
2.They can be funded from outside, no issues by wire transfer or by mailing a check.
3. Interest will be deducted at approx. 30% via TDS. Indian banks do not send any 1099 as that is a US document and the account is not held in the US. Only some US banks like Citibank India send you a 1099. You have to track the interest via online access or statements and report it in the US.
4. You can submit a form to the Indian bank regrding the US tax treaty (15H) and the TDS deduction is reduced to 15%.
5. When submitting US returns, you can take the credit for foreign tax paid.
C. That is your decision. It is a hassle but the returns are good.

[greyfri]

One point to add is that you can only take credit for TDS in US tax returns if the tax is actually due to India. If you are below taxable limit on India income, then irrespective of how much tax was deducted at source in India, you have no Indian tax liability and cannot claim credit in the US. You would have to file an Indian tax return to get the TDS refunded, but will only be able to claim US tax credit for tax that is actually due and paid to India.

[pskum]

thanks Imissindia and greyfri.

[casperof1999]

which banks/FIs are getting you these yields ? I checked HSBC and the max they are offering is ~9%

1.NRO deposits give a yield of about 10.5 to 11.5 % if opened for more than one year. Most banks have a 9.25% for 2-3 year period.The 9% you refer to is APR. Indian banks are not allowed to advertise APY yields like it is done in the US.
2.They can be funded from outside, no issues by wire transfer or by mailing a check.
3. Interest will be deducted at approx. 30% via TDS. Indian banks do not send any 1099 as that is a US document and the account is not held in the US. Only some US banks like Citibank India send you a 1099. You have to track the interest via online access or statements and report it in the US.
4. You can submit a form to the Indian bank regrding the US tax treaty (15H) and the TDS deduction is reduced to 15%.
5. When submitting US returns, you can take the credit for foreign tax paid.
C. That is your decision. It is a hassle but the returns are good.

[Imissindia]

which banks/FIs are getting you these yields ? I checked HSBC and the max they are offering is ~9%

The answer lies in the first sentence of my post: "NRO deposits give a yield of about 10.5 to 11.5 % if opened for more than one year. Most banks have a 9.25% for 2-3 year period.The 9% you refer to is APR. Indian banks are not allowed to advertise APY yields like it is done in the US "

Most banks have FDs at 9.25 to 9.75 %. This is APR. In India, banks cannot advertise APY like you see in the US. The interest in compounded every month or every quarter depending on the bank and this makes the principle grow each quarter. Hence the interest generated next quarter increases a bit and soon. This becomes even better if the FD is for more than a year, say for a 3 year term. In the US, the banks already factor this increase in and advertise the higher total yield (APY).

For an example, take a look here at Bank of India's website. They are showing the APR which you normally see in India and the APY. For an FD for 555 days, the interest rate (APR) is 9.25% but the actual yield (which I quoted in my post) is 9.80%. The yield goes up to 10.83% for longer terms. Scroll down to the bottom of the page to see this:

http://www.bankofindia.com/rupeetermdeposit.aspx

[vsri]

It is nice return in India. Another draw back is you have to pay tax for the interest earned in India in US in US$. Dollar value could fluctuate...

Is there a FD with two to three years period and pays interest at the end of maturity?

[Imissindia]

It is nice return in India. Another draw back is you have to pay tax for the interest earned in India in US in US$. Dollar value could fluctuate...

Is there a FD with two to three years period and pays interest at the end of maturity?

Yes you have to pay tax in US but using the DDTA you can claim some deduction for Indian taxes. All FDs pay interest at the end (on maturity) but interest is credited to your principal every quarter and that earns you a higher yield.

[lokesh122]

Yes you have to pay tax in US but using the DDTA you can claim some deduction for Indian taxes. All FDs pay interest at the end (on maturity) but interest is credited to your principal every quarter and that earns you a higher yield.

Is it an option to pay tax at the end of maturity? What kind of document do I need to produce (for interest earned on NRO FDs) while filing taxes in US?

[greyfri]

Is it an option to pay tax at the end of maturity? What kind of document do I need to produce (for interest earned on NRO FDs) while filing taxes in US?

In the US, for FDs > 1 year, you have to pay tax from day one for FDs that reinvest interest. The documents you need for US tax returns are TDS certificates from bank. Note that because the Indian and US tax years are different, some of the Indian tax may be accrued, but not paid.