As per the FEMA (Foreign Exchange Management Act) guidelines issued by the Reserve Bank of India (RBI), a Non-Resident Indian (NRI) can hold three types of accounts – NRE accounts, NRO accounts and FCNR(B) accounts. The benefits of FCNR accounts are as below, which help them score over the other types of NRI accounts:
- Denominated in Foreign Currency – FCNR deposits are denominated in foreign currency. In contrast, the other categories of NRI account, viz. NRO and NRE accounts are denominated only in Indian rupees. As such, FCNR deposits eliminate the risk of currency rates for the NRIs. This also enables the deposit holder to transfer the funds abroad without any currency conversion.
- Multiple Currencies – An NRI can hold the deposit in any of the specified freely convertible foreign currencies, including US Dollar (USD), Pound Sterling (GBP), Euro (EUR), Japanese Yen (JPY), etc. The deposit holder can select the currency as per their preferences. Such selection may also be based on the potential utilization of the deposit balances in the target currency.
- Flexible Tenure for Term Deposits – An NRI can open FCNR deposits for varied tenors, which may range from one year to up to five years. Upon maturity, the banks may transfer the proceeds of FCNR deposits to NRE/ NRO accounts or renew again as FCNR deposits. However, banks are not allowed to accept or renew deposits for more than five years.
- Option for Fixed Interest Rate Deposits – Banks may offer fixed rate FCNR(B) deposits or floating rate FCNR deposits linked with Alternate Reference Rates (ARR). An NRI can opt for fixed interest rate FCNR (B) deposits, wherein the interest rate stays fixed across the entire deposit duration and is compounded on a half-yearly basis by the bank. In the case of floating rate deposits, the floating rate benchmark must be reset at least every six months.
- Free Repatriation of Funds outside India – The balances in FCNR deposits, including principal and interest income, are freely repatriable, unlike NRO deposits, where the repatriation of funds can be done only up to specified limits. Therefore, the closure proceeds of FCNR deposits can be transferred by the deposit holder outside India without any restrictions.
- Premature Withdrawal – In case of fund requirement, the deposit holder can prematurely withdraw FCNR deposits, subject to premature withdrawal penalty. However, if such deposits are withdrawn prematurely within one year of deposit, the bank does not pay any interest for the deposit period. If the funds are withdrawn prematurely post one-year investment period, the bank is also liable to pay interest for the period the deposit has actually stayed with the bank.
- Continuation of the Deposit upon Change in Residential Status – If the residential status changes from non-resident to the resident while an FCNR deposit has already been opened, NRI can continue to hold such deposits as FCNR deposits till their contractual maturity. However, upon maturity of such FCNR deposits, the bank may convert the deposit into a resident rupee deposit or RFC (Resident Foreign Currency) deposit at the account holder’s option.
- Tax Exemption on Interest Income – As per the prevailing tax laws, the interest income on FCNR deposits is exempt from Income tax in India. Accordingly, the deposit holders are not required to pay any tax on such interest income. Further, due to the tax-exempt nature of such interest income, no TDS is deducted on such income, which may also relieve the NRIs from the return filing process and claiming a refund from the Income tax authorities.
Disclaimer – The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules, as tax benefits are subject to changes due to change in tax laws.