Lock-in Periods and Premature Withdrawal Rules for NRIs

For Non-Resident Indians (NRIs), the selection of any investment means identifying the balance between risk-return, liquidity, tax efficiency, and the attraction of repatriation. Even as fixed deposits, ELSS, NPS, and PPF schemes provide capital protection or stable returns, they differ along various avenues of NRI fixed deposit lock-in periods and withdrawals. A basic knowledge of how these are governed under the Reserve Bank of India (RBI), Foreign Exchange Management Act (FEMA), and the Income Tax Act will allow the NRIs to make the decisions in a compliant manner and with respect to their investments, which will go a long way in preventing negative consequences.

Overview of Liquidity, Tax, and Repatriation

Liquidity determines how quickly funds can be accessed, tax rules determine the treatment of accrued gains once funds are withdrawn, and repatriation governs how freely funds can be repatriated abroad. 

For example, a withdrawal before maturity typically reduces the interest earned and incurs tax deduction at source (TDS). 

NRE and FCNR deposits are repatriable; however, NRO accounts and domestic instruments are subject to repatriation limits. 

The trifecta of liquidity, tax and repatriation is the three levers that allow NRIs to optimise their global investment portfolio. 

Regulatory Foundation: RBI, FEMA, and Tax Regulations

The RBI allows NRIs to hold three types of accounts: NRE, NRO, and FCNR(B), each of which has its own terms for lock-in and repatriation. Withdrawals before the stipulated lock-in period are subject to a reduced rate of interest depending on bank-established terms. 

Once an NRI relocates to India, they will be able to easily convert these accounts to either resident accounts or RFC (Resident Foreign Currency) accounts, which are also subject to the guidelines outlined by the RBI.

Lock-in Period for NRI Investments

Some of the popular investment products for NRIs are:

NRE Fixed Deposits

NRE Fixed Deposits (Non-Resident External) are deposits available to non-residents in India that allow for tax-free interest income on foreign income in India. These deposits have a one-year lock-in period, and most banks stipulate that no interest will accrue if the deposit is withdrawn within the one-year period. 

NRO Fixed Deposits

NRI fd premature withdrawal rules can be made, but there is usually a penalty of 1% reduction of interest or interest paid at the rate applicable to the actual number of months of tenure held. Interest earned on NRO deposits is taxable in India, with TDS at 30% plus surcharge and cess. Up to USD 1 million can be repatriated in a financial year, with submission of documentation (Form 15CA/15CB and CA certification). 

FCNR (B) Deposits

Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits allow non-resident Indians to keep their funds in authorised foreign currencies (USD, GBP, EUR, etc.) for 1–5 years. These deposits are exempt from fluctuation in exchange rates, and interest is paid in the same currency as the deposit. The RBI has mandated that if the deposit is withdrawn prior to one year, interest will not be paid. If an FCNR deposit is withdrawn before completion of one year, no interest is payable. After one year, interest payment on premature withdrawal depends on the contract terms with the bank- it may be the contracted rate (for the period held) or a bank-specified reduced rate or penalty.

Premature Withdrawal Rules for NRIs: ELSS, NPS, and PPF

• ELSS (Equity Linked Savings Scheme): SEBI regulates ELSS mutual funds, which carry a 3-year lock-in; also, each SIP instalment is a lock-in period. Withdrawals are not allowed during this NRI investment lock-in period.

• NPS (National Pension System): After a lock-in period of 5 years, premature exits are allowed eventually. However, after the 5-year lock-in period, 20% of the total investment can be withdrawn in a lump sum, and the remaining 80% must be converted to an annuity.

• PPF (Public Provident Fund): NRIs cannot open a new PPF account, but if the account was opened while resident, contributions can continue only until the original 15-year maturity.
  After maturity, no extension is allowed for NRIs, and withdrawal proceeds are credited to an NRO account on a typically non-repatriable basis.

Repatriation Process and Documentation for Withdrawal

When NRE funds are used for investment in NRE accounts, the interest, along with principal, is repatriable. 

For NRO funds, your bank will ask for a few things:

• Form 15CA/15CB (that’s a CA certificate)

• Proof of where your funds came from

• PAN and KYC documents

• Tax Residency Certificate (TRC) if you want DTAA benefits

Banks suggest you start your repatriation process early, since verification takes time. And hang on to all your records; if there’s ever an audit or compliance check, you’ll need them.

Here are some example case scenarios:

• You close an NRE FD at 10 months: no interest for you.

• You break an NRO FD early and earned a lot of interest, then 30% TDS (depending on DTAA), and remember, you can only send up to USD 1 million out in a year.

• You redeem ELSS SIP after 3 years: you get all your units, and long-term capital gains over ₹1.25 lakh are taxed at 12.5%.

• NPS exit after 6 years (before the age of 60): you can withdraw 20%, the rest goes into an annuity. How you’re taxed depends on your income slab.

Below is a quick overview of the above-mentioned investment options for NRIs:

Note: Bank-specific exceptions and rate differentials may apply.

How to Invest Right?

Some tips for NRIs to invest in the right products in India:

1. Bank and product terms should be understood, and never skip the fine print.

2. Subtract TDS and tax from the total returns to arrive at what you actually earn from the investment. 

3. Confirm that your TRC and DTAA forms are up to date.

4. Reconfirm the mode and monetary limits of repatriation.  

5. Keep some emergency funds outside of lock-in products.

Conclusion 

NRIs wanting to invest in India can choose from stable return policies like fixed deposits to market-linked schemes like ELSS, PPF, and NPS. These products have varied lock-in periods and restrictions with respect to withdrawals. When you invest in such instruments, your money will be locked in for specific years, and exiting before this lock-in will trigger penalties. Moreover, partial withdrawal or exit before the lock-in also has limitations. Knowing all of these helps you to make the right decision. 

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FAQs

1. Can NRIs withdraw NRE fixed deposits before maturity?

Yes. But if you pull out before a year, you won’t get any interest. 

2. Are NRO deposit proceeds freely repatriable?

No, they are not so repatriable. There is a cap of USD 1 million per annum, along with various other documentation and a CA certificate required.

3. Do NRIs need to pay tax on FCNR(B) deposits? 

No tax payable in India on interest earned on FCNR(B) deposits.

4. What happens to deposits after an NRI comes back to India?

As per the rules of RBI, you may open such deposits as Resident or RFC accounts so that you will be compliant and your funds may be accessible.