The Indian rupee generally depreciates against the US dollar in the long run due to inflation differentials, among other factors. This persistent depreciation means that foreign currency-denominated investments often deliver higher returns in rupee terms over time.
Apart from real estate and Indian equity investments, FCNR (Foreign Currency Non-Resident) accounts offer a safe and liquid investment option for NRIs. The Foreign Exchange Management Act (FEMA) allows non-residents to maintain bank accounts in permitted foreign currencies, known as FCNR accounts. Let us look at their key features.
Basic features of the account
An FCNR account can be opened only as a fixed deposit, not as a current or savings account, unlike NRE and NRO accounts. Strictly speaking, FCNR is a subset of NRE accounts.
These accounts can be opened only in “permitted foreign currencies” that are freely convertible into Indian rupees. These include the US dollar, the euro, the pound sterling, the Japanese yen, the Canadian dollar, the Australian dollar, and the Singapore dollar.
FCNR deposits can be opened for tenures ranging from one to five years. Premature withdrawal attracts a penalty in the form of a reduced interest rate. However, if the deposit is withdrawn before the end of the first year, no interest is payable.
Loans can be taken against FCNR deposits for personal or business purposes, including the purchase of a residential property in India. However, such loans cannot be used for onward lending, agricultural land purchases, or real estate business activities.
Who can open an FCNR account?
Any Indian citizen who qualifies as a non-resident under FEMA can open an FCNR account. Additionally, foreign citizens of Indian origin (PIOs) may open such accounts. Both categories are collectively referred to as NRIs under FEMA.
FCNR accounts can be opened singly or jointly. In the case of joint accounts, the second holder must also be an NRI. Resident relatives can be added as joint holders on a “former or survivor” basis.
You can appoint any person, including a resident, as a nominee for your FCNR account.
How to open an FCNR account
An FCNR account can be funded through foreign currency remitted via banking channels from outside India, transfers from an NRE or another FCNR account, or cheques drawn on foreign currency accounts. It can also be opened by depositing traveller’s cheques or foreign currency brought into India.
It is not necessary for you to be physically present in India to open an FCNR account. NRIs can open this account at an overseas branch, but you will need to submit basic documents, such as a copy of your passport and proof of foreign address.
Interest rate and Exchange rate
The interest rate for each currency differs for the FCNR account. The interest rate on FCNR accounts is generally lower than the rate offered to Indian residents on resident deposits. However, the interest rate on FCNR accounts is generally higher than that offered on deposits in their country of residence.
Since these accounts are opened in foreign currency, there is no risk from exchange rate fluctuations between the deposit currency and the Indian currency. As exchange rate risk is eliminated and the interest rate offered is higher than that in their home countries, these deposits offer a better risk-free investment opportunity to NRIs.
The interest and principal credited to the FCNR account are fully repatriable and can be freely remitted outside India without any permission from the RBI. The interest can also be credited to your NRE or NRO account.
Taxation of the interest on FCNR
The interest on FCNR account is exempt from tax in India but may be taxable in the country of your residence, depending on your residential status under the respective tax laws.
If you become a resident under FEMA, the interest on the FCNR account will remain exempt until maturity. This is in contrast to the interest on NRE account, which remains tax exempt till you are a non-resident under FEMA laws and becomes taxable immediately on your becoming resident for FEMA purposes.
Balwant Jain is a tax and investment expert. Views expressed are personal.
