Fundamental principles remaining same, let's take a look at the avenues where an NRI can invest the fund for contingencies
Unlike a regular fixed deposit, interest earned on a Non-resident External (NRE) fixed deposit is tax-free in India. An NRE or an NRO (Non-resident Ordinary) are two types of different accounts which are mostly used by NRIs to park their funds in India. An NRE account is used when you want to deposit your foreign earnings in Indian currency. It can be repatriated back to the country of the NRI's residence as and when they want. An NRO account is used by NRIs for depositing their earnings that took place in India. The interest on an NRO account or even a fixed deposit opened through it is taxable like any other regular fixed deposit. It is added to the taxable income and taxed as per the applicable slab. Further the tax deducted at source (TDS) of 30 per cent is applicable.
Ideally, as we always say, the emergency corpus should be spread across three layers. Some cash in your cupboard followed by some amount in your bank account which can be readily withdrawn through an ATM. This can even be in the form of a sweep-in deposit. The third layer is where you should look to optimise the return on the idle money without compromising on the liquidity. An ultra-short duration fund or a short-duration fund is generally recommended here.
They have the potential to earn higher returns than a fixed deposit and carry a favourable tax treatment in comparison to a regular or an NRO fixed deposit. The gains are taxed only when you realise them, that is at the time of redeeming your money. And further, if the holding period is more than three years, you can also adjust the cost of purchase for inflation through indexation, thereby reducing the tax liability.
Gains on debt funds if redeemed within three years are added to the taxable income. TDS of 30 per cent is applicable in case of an NRI. If the holding period is more than 3 years, the gains are taxed at 20 per cent after providing the benefit of indexation. TDS of 20 per cent is applicable in case of an NRI.
So to conclude, the decision would first depend on whether you plan to open the deposit through foreign earnings (NRE account) or through an NRO account as both have a different tax treatment. While an NRE deposit looks like a viable option, provided you get the required liquidity, an NRO deposit scores less on taxability as well as liquidity in terms of repatriating the amount to a foreign country. Secondly, if you are ready to take a bit of risk for higher returns, you may opt for a debt fund. They might help you earn a little more, specifically over a period of more than three years. But if you are seeking absolute safety, go with the bank deposit.
And irrespective of where you invest this money, since it is a part of your contingency corpus, it should be readily available at any hour of the day to you and in the country where you may need the money. Earning higher return or interest should not be the motive here, but liquidity and availability of the funds should be.