Remit money to India from balance transfer of credit card

Question

I am a tax resident of USA and citizen of India. Lately, I have been receiving 0% interest balance transfer offers from credit card companies. The offer is - they will charge me 0% interest for 12 months and 3% fee for balance transfer amount. The balance transfer can be done as direct deposit to my checking account.

I plan to use this offer to get a direct deposit of $5000 in my checking account and later transfer the same to have a NRE FD account in India which is giving me 8% interest/annum.

My questions - Is this transaction legal (couldn't come up with a better word, I hope you get what I mean)? Are there any tax implications in US? From what I understand, there are no tax implications in India. Also, I will pay back $5000 within 12 months.

Adding one more question - I have a SBI MaxGain home loan back in India. Its interest is 9.7%, started in Jan'13 for 20 years. Will it make sense to use the balance transfer from credit card to park money in this MaxGain account? From what I understand, keeping money in this account is like FD as I will be saving money on the interest part of the home loan; in effect I will save 6.7% interest in one year (9.7% home loan interest - 3% fee). Is that how simple it is or I am missing something?

Answer 1

Is this transaction legal

Yes it is.

Are there any tax implications in US?

The interest is taxable in US.

From what I understand, there are no tax implications in India.

Yes this is right.

The question you haven't asked is does this makes sense?
So you are paying 3% upfront. Getting 8% at end of one year. You can making monthly repayments through the year. You have not factored in the Fx Rate and their fluctuations. For Example you would convert USD to INR and back to USD. Even if you do this the same day, you loose around 2% that is referred to as Fx Spread. Plus the rates for USD and INR get adjusted for inflation. This means that INR will loose value in a year. In long term it would be balance out [i.e. the gain in interest rate is offset by loss in Fx rate]. At times its ahead or behind due to local conditions.

Answer 2

As Dheer has already told you in his answer, your plan is perfectly legal, and there are no US tax issues other than making sure that you report all the interest that you earn in all your NRE accounts (not just this one) as well as all your NRO accounts, stock and mutual fund dividends and capital gains, rental income, etc to the IRS and pay appropriate taxes. (You do get a credit from the IRS for taxes paid to India on NRO account income etc) You also may also need to report the existence of accounts if the balance exceeds $10K at any time etc.

But, in addition to the foreign exchange conversion risk that Dheer has pointed out to you, have you given any thought to what is going to happen with that credit card? That 0% interest balance of $5K does not mean an interest-free loan 0f $5K for a year (with $150 service charge on that transaction). Instead, consider the following.

• If you use the card for any purchases, then after the first month, your purchases will be charged interest from the day that you make them till the day they are paid off: there is no 25-day grace period. The only way to avoid this is to pay off the full balance ($5K 0% interest loan PLUS $150 service charge as well as any other service charges, annual fees etc PLUS all purchases PLUS any interest) shown on the first monthly statement that you receive after taking that loan. If you choose this option, then, in effect, have taken a $5K loan for only about 55 days and have paid 3% interest (sorry, I meant to write) service fee for the privilege.

• If you don't use the card for any purchases at all, then the first monthly statement will show a statement balance of $5130 and (most likely) a minimum required payment of $200. By law, the minimum required payment is all interest charged for that month($0) PLUS all service fees charged during that month ($150) PLUS 1% of the rest ($50). Well, actually the law says something like "a sufficient fraction of the balance to ensure that a person making the required minimum payment each month can pay off the debt in a reasonable time" and most credit card companies choose 1% as the sufficient fraction and 108 months as a reasonable time.

  OK, so you pay the $200 and feel that you have paid off the service fee and $50 of that 0% interest loan. Not so! If you make the required minimum payment, the law allows that amount to be be applied to any part of the balance owing. It is only the excess over the minimum payment that the law says must be applied to the balance being charged the highest rate. So, you have paid off $200 of that $5K loan and still owe the service fee. The following month's statement will include interest on that unpaid $150. In short, to leave only the 0% balance owing, you have to pay $350 that first month so that next month's statement balance will be $4800 at 0%. The next month's required minimum payment will be $48, and so on.

  In short, you really need to keep on top of things and understand how credit-card payments really work in order to pull off your scheme successfully. Note also that the remaining part of that 0% interest balance must be paid off by the end of the period or else a humongous rate of interest will be applied retroactively from Day One, more than enough to blow away all that FD interest. So make sure that you have the cash handy to pay it off in timely fashion when it comes due.