MUMBAI, AUGUST 09, 2004
TIMES NEWS NETWORK
NRIs are prematurely withdrawing their deposits from
banks in India following the Budget proposal to scrap tax exemption
on the interest earned on all their rupee and foreign currency deposits.
The withdrawals are happening in deposits maturing after
September 1 the effective date when the tax exemption is likely
to be withdrawn.
NRI depositors feel it makes more sense to pay a 1%
penalty against premature withdrawal, rather than paying a tax which
could vary from 10% to 30%, depending on the income.
Already, there has been a slowdown in large deposits
from Indians overseas with the Reserve Bank of India having lowered
the interest return that banks here can offer.
The three main NRI deposit schemes are: FCNR - for foreign
currency deposits , NRE - for rupee term deposits and rupee savings
accounts
Several NRIs, particularly those in the US, were not
disclosing the money parked with banks in India to the overseas tax
authority. The interest income from these deposits will be clubbed with
NRIs other income earned in India, and subject to income tax.
NRIs are unclear whether the tax would be applicable
only on fresh deposits or even on those that mature on or after September
1.
The uncertainty is fuelling such premature withdrawals.
When contacted, bank officials told ET that they are awaiting the government
notification for further clarity on taxation issue.
Bankers said that NRIs are pulling out of Indian banks
and investing in banks abroad. This is partly because the difference
between the rates offered abroad and India has come down sharply, which
was as much as 250 basis points a year ago.
Similarly, investors of State Bank of Indias India
Millennium Deposit (which mature in 2005) are worried could be taxed.
Sources said that SBI has approached the finance ministry
seeking clarity on the matter. SBI had mopped up $5.5 bn through the
IMD programme in 00. Under the original terms of IMD, the deposits
were said to be free from Indian Income tax, gift tax and wealth tax.
The slowdown in NRI deposits is happening since July
03 when RBI capped the interest rates on NRE deposits for one
to three years, at Libor dollar rates of corresponding maturity. RBI
also brought the NRI savings account return at par with local return.
NRE deposits had peaked in April 03 when the net inflow touched
$900m in a single month. It fell to $153 m in April 04. Earlier,
banks could offer a significant mark-up over the Libor - the London
money market rate which serves as an international benchmark.
This triggered an interest rate arbitrage by NRIs, many
of whom had even borrowed money abroad to park with Indian banks. Thanks
to the sustained fall of dollar against the rupee in 03, on several
cases the rupee deposits were kept unhedged which increased the spread
for NRIs saving on the hedging cost.
Only those investors who have no options especially
from the Middle East would continue to put their money in fixed deposits.
However, a part of this money may also flow into other areas like real
estate, mutual funds or equities, said a banker.