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. Amongst these categories, NRO and NRE accounts are maintained in Indian Rupees, while FCNR deposits are denominated in foreign currency. 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. This enables the deposit holder for FCNR deposits to transfer the funds abroad without any currency conversion. To help NRIs make an informed decision to pick the correct deposit account for them, the pros and cons of FCNR deposit accounts are discussed below.
Pros of FNCR Deposits
The favourable features of FCNR deposits are as below:
- 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.
- 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 deposit holder can transfer the closure proceeds of FCNR deposits 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. If the funds are withdrawn prematurely post one-year investment period, the bank is also liable to pay interest for the period the deposit has stayed with the bank.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.
Cons of FCNR Deposits
The following features of FCNR deposits may not be in favour of the deposit holders:
- No Interest on Premature Withdrawal within one year – While FCNR deposits allow premature withdrawal, the bank does not pay any interest for the deposit period if such deposits are withdrawn prematurely within one year of deposit.
- Funding Restrictions – Such deposits cannot be created through rupee credit and can only be created by funding through foreign currency remittances from outside India or an existing NRE/ FCNR account held by the deposit holder.
- Restrictions for Joint Account Holders – Such accounts can be held jointly only with another NRI and cannot be held jointly with a resident Indian.
- Lower Interest Rates – Since FCNR deposits are held in foreign currencies, the interest rates are relatively lower for the deposit holders in line with the prevailing lower interest rates for such currencies in their home countries. Such interest rates are also regulated through an upper ceiling limit by the Reserve Bank of India (RBI).
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.
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