5

My savings account in the U.S. says that it gives me an interest rate of 0.01% and it comes with a lot of restrictions (like limiting the number of transactions per month etc.), and checking account has no interest.

The bank account I have in India gives me an interest rate of 3%+ with no restriction on transactions. Also, I have the option of moving surplus funds to a fixed deposit which would get broken when funds in my primary account are low, but would give me an interest of almost 7.5% (calculated daily).

My questions are:

  1. Is there really a difference in the interest rates for accounts in India vs. the U.S.? Why?
  2. Would it be better for me to transfer any surplus funds I have to my account in India – while setting aside an emergency fund here in the U.S. and also keeping in mind that I will be moving back after a couple of years?
2

The Interest rate of 3% and 7.5% is for funds held in regular savings account that are denominated in Rupee. Moving these funds back to US will require compliance with Indian Foreign Exchange Act. If you are not intending to move funds back to US, then this would be good move. However you would still need to pay tax in US on the interest generated as personal tax in US requires one to pay tax on income world wide. As also pointed out by others, there is a risk of FX Conversion.

The other option is to hold funds in NRE or USD denominated acounts where funds can be moved back to US without any hassel and are held in USD. However the interest rate on these accounts is similar to what one would get in US, slightly better at best.

So you need to figure out if you need the funds back in US, then I guess keeping it in US would be a good move. However if you do not need the funds back in US, then moving it to India would make sense.

  • But how would US know how much interest is generated in my savings account in India, especially if I also have other domestic(Indian) transactions? – rest_day Oct 27 '11 at 17:59
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    Its your duty as honest citizen to report it. Its not just the interest in India, but any other income that your generate must be reported and tax paid in US. There is quite a few US Banks fined for not following the regulations. – Dheer Oct 28 '11 at 3:19
  • But I am an Indian citizen... not sure if that makes a difference... because I might be taxed in India too – rest_day Oct 28 '11 at 4:47
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    If you are an Indian citizen, and NRE you will be taxed on the Interest generated in India. Plus any other income. The income of US will not be taxed in India [assuming you have gone there on a H1/L1 and are away from India for more than 183 days in financial year]. India US do not have dual tax exemption treay and hence you would be taxed at both places. [its there only for small business and certian professions like teacher etc] – Dheer Oct 28 '11 at 6:46
6

There's a concept called interest rate parity, which sort of says that you cannot profit on the difference in interest rates. This difference accounts for the predicted movement in exchange rates as well, along with the stability of the currencies.

5

For any money you plan on taking back with you to India in a couple of years, you need to consider whether you expect the U.S. dollar to gain strength compared to the Indian rupee, and if so, by enough to make up the difference in interest rates. According to exchange-rates.org, $1 USD would buy you 44.22576 INR on April 29, 2011, and 49.41525 on October 25, 2011. If the Indian rupee keeps on losing strength against the U.S. dollar at that rate, you are far, far better to keep your money in U.S. currency. On the other hand, if the Indian rupee gains strength, you'd be better to convert your money as soon as possible.

There are, of course, other options if you plan to keep your money in the U.S., many of which will pay more than 0.01% interest.

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    I should note that I assumed you were "moving back" to India, but it looks like perhaps you are "moving back" to the U.S. in a couple of years. It doesn't really change much in my answer, mind you. – ChrisInEdmonton Oct 27 '11 at 13:44
  • Yes, I am moving back to India. – rest_day Oct 27 '11 at 15:27
1

The year over year compounding in India has the potential to make up for interest rate parity. But 3% isn't really going to create convenient amounts of earnings either until you get to larger amounts.

  • True, 3% is not going to get much, but it really becomes 7.5% if I use fixed deposits (+ no loss in liquidity) – rest_day Oct 26 '11 at 22:31
  • 7.5% now you are talking. The compounding here + adding earnings monthly will greatly increase your holdings. What bank is this? – CQM Oct 26 '11 at 23:20
  • A lot of banks offer this facility. A list of major banks that offer this facility is in the link in my question. rupeetalk.com/blog/auto-sweep-facility-have-you-enabled-it – rest_day Oct 26 '11 at 23:47
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I would keep some money in the U.S. and some money in India. That way, in case "something bad" happens in one country, you will still have money in the other.

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