The long-term and persistent depreciation of Indian rupees results in investment products denominated in foreign currencies, generally offering higher yields in terms of Indian rupees over the years. In addition to real estate and Indian equity investment in India, the Non Resident Foreign Currency Account (FCNR) also provides a safe and liquid investment opportunity for NRIs. Let’s discuss the different features of the FCNR account.
Basic Account Features
The FCNR account can only be opened as a fixed deposit and only in “permitted foreign currencies” freely convertible into Indian Rupees. These include various foreign currencies such as British Pound, US Dollar, Canadian Dollar, Australian Dollar, Euro and Japanese Yen etc. These accounts can be opened for a period of between one and five years. In case of early withdrawals, you have to pay a penalty in terms of the reduction in the interest rate you will get. However, if FCNR deposits are liquidated before the completion of one year, no interest is payable.
A loan can be taken out of the deposits of the FCNR for personal or professional needs, but not for the purpose of later lending or acquiring agricultural land or for any real estate business. However, you can use the money to acquire an apartment or a house for your own residence in India.
Who and how to open an FCNR account
Anyone who is an Indian citizen and a non-resident under FEMA can open an FCNR account. Moreover, non-Indian citizens and people of Indian origin are also allowed to open the FCNR account. These two categories of people are collectively referred to as NRIs under FEMA. The FCNR account can be opened in a single or joint name, but in the case of a joint account, the co-holder must also be an NRI. Your next of kin are allowed as joint account holders on the “Elder or Survivor”. As with other bank accounts, you can appoint a proxy for your FCNR account and the proxy does not need to be an NRI. The FCNR account can be opened with money transferred in foreign currency. by banking outside India or by wire transfer from your NRE account or any other FCNR account or by check drawn on any bank account held in foreign currency. It can also be opened by presenting travelers checks or foreign currency while traveling in India.
You do not need to be physically present in India to open an FCNR account. NRIs can open this account in the overseas branch but need to submit some basic documents like copy of passport, proof of overseas address, etc.
Interest rate and exchange rate
The interest rate for the FCNR account for each of the currencies is different. The interest rate on the FCNR account is generally lower than the deposit rate for Indian residents. However, the interest rate on FCNR accounts is usually higher than that offered in their country of residence. Since these accounts are opened in foreign currencies, there is no risk due to variations in the exchange rate of the deposit currency and the Indian currency. As currency risk is eliminated and the interest rate offered is higher than that offered by their home country, these deposits provide a better risk-free investment opportunity for NRIs. Interest credited to FCNR Account and Principal Amount of FCNR Account are fully repatriable and can be freely transferred outside India without the permission of RBI. Interest can also be credited to your NRE or NRO account.
Taxation of interest on FCNR
Interest on FCNR Account is tax exempt in India but may be taxable in the country of your residence depending on your residency status in the country of your residence. If you become a FEMA resident, when you return permanently to India, interest on the FCNR account will still be tax-free until the FCNR account matures. This contrasts with interest on the NRE account which remains tax exempt until you are a non-resident under FEMA and becomes taxable immediately upon becoming a resident under FEMA.
Balwant Jain is a tax and investment expert and can be contacted at [email protected] and @jainbalwant on Twitter.
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