A Non-Resident Indian (NRI) refers to an Indian citizen who resides outside India for employment, business, or any other purpose for an indefinite period of time. NRIs have specific avenues available to invest and deposit their funds in India. One of the common investment routes is through deposits in Indian companies, which can be made under a non-repatriation basis.

Non-Repatriation Basis

When an NRI makes a deposit under a non-repatriation basis, it means that the funds deposited in India cannot be transferred (repatriated) back to the foreign country from which the NRI resides without specific approval. This differs from repatriable deposits, where the NRI can repatriate both the principal and the interest earned on the deposits to their country of residence.

In the case of non-repatriable deposits, the NRI must maintain the funds within India, and the principal amount, as well as the interest earned, will remain in India.

Types of Deposits by NRIs under Non-Repatriation Basis

1. Non-Resident External (NRE) Deposit:
   • An NRE account is opened by an NRI to deposit earnings that are sourced from abroad, in Indian Rupees. The key features include:
     • Repatriable: Funds in NRE accounts can be freely repatriated abroad, both principal and interest.
     • Tax Exemption: The interest earned is tax-exempt in India.
     • Deposit in Non-Repatriable Mode: An NRI may convert their NRE account to a non-repatriable basis, restricting the transfer of funds abroad. The deposit in such an account cannot be sent back without approval from the Reserve Bank of India (RBI).
2. Non-Resident Ordinary (NRO) Deposit:
   • The NRO account is used by NRIs to manage income earned in India, such as rent, dividends, pensions, etc. A non-repatriation NRO deposit means:
     • Interest Taxable: Interest earned on an NRO account is taxable in India.
     • Principal Restrictions: In case of non-repatriation, the principal amount cannot be transferred outside India, except under specific circumstances or with the permission of RBI.
3. Foreign Currency Non-Resident (FCNR) Deposit:
   • The FCNR account is a type of fixed deposit held by NRIs in foreign currency. It can also be held on a non-repatriation basis. Key characteristics include:
     • Currency Options: Available in major foreign currencies (such as USD, GBP, EUR, etc.).
     • Interest Tax Exempt: The interest earned is tax-exempt in India for NRIs.
     • Non-Repatriable: If the account is set up under a non-repatriation basis, the funds cannot be transferred back to the NRI’s country of residence.

Regulations Under FEMA for Non-Repatriable Deposits by NRIs

1. FEMA Compliance:
   • FEMA (Foreign Exchange Management Act) governs the management of foreign exchange in India, including NRI deposits. Under FEMA, the funds deposited in India by an NRI under a non-repatriation basis are subject to certain regulatory requirements.
   • These deposits will not be allowed to be transferred abroad, except under specific circumstances as outlined by FEMA.
2. Bank Procedures:
   • The bank must open the account in the name of the NRI and ensure the account is clearly marked as a non-repatriable deposit account.
   • For non-repatriable deposits, the NRI must indicate to the bank that the funds will remain in India and not be repatriated abroad. Banks may have separate procedures for handling these kinds of deposits.

Taxation on Non-Repatriable Deposits for NRIs

1. Interest Income Tax:
   • For NRO accounts, the interest earned is taxable in India under the Income Tax Act. The applicable tax rate is subject to the nature of income and tax slabs. Typically, TDS (Tax Deducted at Source) is applicable at a rate of 30% (plus applicable surcharge and cess), which can be adjusted by filing a tax return.
   • NRE and FCNR accounts: The interest on NRE deposits and FCNR deposits is tax-exempt in India.
2. Reinvestment Options:
   • Non-repatriable funds in an NRI’s NRO account can still be reinvested in India for the purpose of earning income in the form of interest, dividends, or other earnings. However, the principal is still subject to non-repatriation.

Advantages of Non-Repatriable Deposits

1. Safety and Security:
   • NRIs can safely deposit funds in India, knowing that they are governed by stringent Indian banking regulations and have the assurance of the Reserve Bank of India (RBI) for their safety.
2. Higher Returns:
   • Non-repatriable deposits may offer relatively higher interest rates than NRE accounts because these funds are to be retained within India, providing a source of financing for the Indian banking system.
3. Access to Indian Market:
   • NRIs can access a wide range of investment opportunities in India, including fixed deposits, stocks, bonds, and government securities, all of which are available for non-repatriable funds.
4. Tax Benefits:
   • Funds held in NRE accounts or FCNR accounts under a non-repatriation mode are tax-exempt in India, providing tax advantages to NRIs.
5. Loan Collateral:
   • Non-repatriable deposits can sometimes be used as collateral for loans in India, which may be beneficial if an NRI wishes to secure credit while remaining outside the country.

Limitations and Restrictions

1. Non-Repatriation Restrictions:
   • One of the key limitations of non-repatriable deposits is that the principal amount cannot be transferred to the NRI’s country of residence, thus making it less flexible in terms of liquidity.
2. Tax on Interest Income:
   • While the interest income on NRO accounts is taxable, it may also be subject to a higher tax rate compared to NRE accounts, which are tax-exempt. This makes NRO deposits less attractive for NRIs looking to avoid tax liabilities.
3. Limited Liquidity:
   • Non-repatriable deposits may be subject to a waiting period before the funds can be utilized within India, and they can’t be easily transferred back to the foreign country. This restricts the flexibility that NRIs might desire in managing their funds.

Conclusion

Non-repatriable deposits are a popular choice for Non-Resident Indians (NRIs) who wish to invest in India but are not looking to transfer the funds back to their country of residence. While these deposits provide security and offer attractive interest rates, they come with certain restrictions on repatriation. NRIs should carefully assess the pros and cons of non-repatriable deposits, particularly in light of the taxation policies, before making investment decisions. Banks and financial institutions in India offer several options for NRIs, and the choice of the right deposit scheme will depend on their specific financial goals and preferences.