NRE interest may be taxed

The internal group of the Reserve Bank of India on external liabilities of scheduled commercial banks has recommended that interest income from non-resident external (NRE) deposits should be taxable in line with domestic deposits.

The report, released today, said that NRE inflows have grown much larger and therefore there is no such need to give these benefits in light of comfortable forex reserves.

The report has proposed a further cut in the interest rate on NRE saving deposit rate to one month London interbank offered rate (Libor) or swap rates on US dollar deposits as against the six month Libor/swap rate at present.

If accepted, the interest rate paid on NRE deposits will come down from around 1.53 per cent (six month Libor) now to 1.10 per cent (one-month Libor).

To kill the arbitrage in interest rate differential in overseas currency and Indian rupee, the Reserve Bank of India has effected four rounds of interest rate cuts on NRE deposit schemes over the last one year.

The last cut was made with effect from close of business in India on April 17 when the interest rates on NRE savings deposits was capped at Libor/swap rates for six-month maturity on US dollar deposits.

The report also said that all foreign currency accounts that are allowed to residents for transaction purpose should be non-interest rate bearing in nature so that risk of dollarisation is under check.

While resident foreign currency ( RFC) scheme may be made non-interest bearing, export earner's foreign currency (EEFC) and RFC (domestic) should continue to remain non-interest rate bearing.

It has further recommended that non-resident ordinary (NRO) deposits be made current/savings account only.

Therefore, the existing term /recurring deposit under NRO scheme may be allowed to be maintained till maturity after which the balances either be allowed to repatriate or be credited to NRO/NRE savings/current deposits.

The report said that in line with the government policy to reduce external debt by resorting to prepayment, it could be consistent with the overall debt management policy to limit exposure to non resident deposits.

Further, it has also made it clear that policy preference relating to external liabilities management should continue to be in favour of equity as against debt.