Since India offers higher interest income as compared to many other countries, many NRIs prefer India for fixed deposits or term deposits. However, they are afraid of foreign exchange risk as well as taxation norms.
So, if you are an NRI, looking for a safe investment option in India without obtaining approval of RBI, then FCNR (Foreign Currency Non-Residence) term deposit account could be one of the best option considering Forex and tax. In this article, I will be covering all the aspects of FCNR term deposit.
What is FCNR Term Deposit?
FCNR stands for Foreign Currency Non-Resident, it a type of fixed deposit for NRI of Indian nationality or PIO. An NRI can maintain a fixed deposit in foreign currency and earn regular interest on the same without prior approval of RBI with authorized dealer banks in India i.e. a bank authorized to deal in foreign exchange.
FCNR accounts allow deposit as well as withdrawal in foreign currency. Therefore, it avoids foreign exchange risk, which is involved in other option of investments in India.
These are the currencies, which are allowed to be deposited in FCNR account –
- US Dollar
- British Pound
- Japanese Yen
- Australian Dollar
- Canadian Dollar
Along with these, RBI has allowed, authorized dealer banks to accept deposits in “Permitted currency” as well. Permitted currency means a foreign currency which is freely convertible and mainly includes, Danish Krone, Swiss Franc, and Swedish Krona.
Features of FCNR Term Deposit
- FCNR account has a maturity ranging from 1 year to 3 years.
- It can be opened jointly with 2 or more NRIs provided, all are persons of Indian nationality or origin
- With FCNR, you can easily repatriate the principal as well as interest to the country of residence/origin
- Nomination facility is available and any NRI, POI or Indian resident can be the nominee
- Recurring deposits are not accepted under this scheme
- On premature withdrawal/transfer to NRE account from FCNR, 1% penalty might be charged (varies from bank to bank)
Below is a video about FCNR account which will give you brief knowledge about it.
What can be the mode of investment?
For FCNR deposit, it is not mandatory to transfer funds from NRE/NRO account, as in the case of other investment options. One can transfer funds from overseas bank account directly to open FCNR account through cheque.
One can also use travelers cheque or foreign currency notes to deposit in FCNR account, on visit to India. Even one can also use an existing FCNR for creating new FCNR term deposit.
Documents required for opening FCNR Account
For opening this account, an application form duly attested by your banker/embassy of India/public notary must be submitted to the bank along with the following documents attached-
- Copy of passport
- Latest overseas bank statement
- Latest overseas address proof
If you are unable to visit India, then you can open this account by issuing power of attorney to a resident individual, who can fulfill all the requirements on your behalf.
Loan facility against FCNR
You can also avail loan against FCNR, provided that the proceeds of loan are not used for the purpose of re-lending i.e granting loan, carrying on agricultural/plantation activities or for investments in real estate sector. However, one can use the loan amount for other financial investment purposes like stocks or mutual funds, etc.
Loan can be availed in rupee or in any foreign currency.
Interest calculation and Taxation
The interest rate on FCNR is compounded yearly and the rate of interest depends on the currency deposited and maturity term of FCNR account. For instance, the rate for a 1-year FCNR deposit in the US dollar would be in the range of 2.5-3% while the same for a deposit in the Australian dollar would be 5-6%.
Interest is calculated at an interval of 180 days each (i.e 6 monthly) and for remaining actual number of days in a year. However, the yearly interest amount is credited at the end of 360 days as per RBI guidelines.
Interest earned on FCNR deposits is tax-exempt as long as an individual qualifies as an NRI or not ordinarily resident. But, it might be taxable as per the prevailing taxation rules of your country of residence/origin.
What are the norms, if NRI status changes to resident Indian?
On change of status, it is your responsibility to inform the bank about it, so that the FCNR account will be designated as a resident account. FCNR will continue to earn interest. However, as the interest income is tax-free in the hands of NRI, now if you are qualifying as a resident or ordinarily resident, you will be taxed as per Indian slab rates, irrespective of the fact that you will be taxed in other country.
If you are afraid of bearing loss due to currency fluctuation then FCNR is a good option as compared to NRE/NRO saving deposits. It is specially designed to cover foreign exchange risk. However, it is very important to choose a good bank for FCNR, because if deposits are made at weak banks, it may be unable to pay back upon maturity.