Advantages of FCNR Deposit Accounts
Here are the key advantages of holding an FCNR Deposit account in India:Â Â
- Exchange Rate Fluctuation Protection: Since FCNR accounts are maintained and repaid in allowed foreign currencies, you are not exposed to movements in the rupee's value during the deposit tenure. However, you may face exchange-rate fluctuations if you convert your currency to permitted currency during funding and withdrawal from the FCNR account.
- Tax-Free in India: Interest earned on FCNR(B) deposit accounts are tax-free and exempt from Tax Deducted at Source (TDS) in India as long as you hold NRI status.Â
- Freely Repatriable: Interest and Principal from an FCNR deposit account can be freely transferred back to your country of residence. The account does not have any repatriation limit under the Foreign Exchange Management Act (FEMA) and RBI regulations.
- Joint Account Facility: You can jointly hold an FCNR deposit account with other NRIs or a resident Indian relative. The exact terms and conditions vary by banks.
- Loan Facility: You can borrow against your FCNR deposit as rupee loans for use within India, and foreign-currency loans for use outside India. The rules vary from bank to bank.
- Interest Compounding: Interest on FCNR deposits is compounded on a half-yearly basis, which can improve your returns throughout the deposit tenure.
- Decent Interest Rate: All authorized banks which provide FCNR Deposit accounts set the rates of interest within the upper limit as decided by the RBI.
Disadvantages of FCNR Deposit Accounts
Here are some disadvantages of FCNR Deposit accounts for NRIs:
- Limited Deposit Insurance: FCNR deposits are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance up to only ₹5,00,000 (Interest and principal combined) per depositor per bank. If your deposit balance exceeds this amount and the bank goes bankrupt, the excess amount may not be guaranteed.
- No Interest on Early Withdrawals: FCNR Deposit accounts are term deposits and no interest is paid if they are withdrawn in less than a year.
- Premature Withdrawal Penalties: The premature withdrawals from FCNR Deposit may attract penalties depending on the bank’s rules.
- Currency Conversion Costs: If you need to convert your deposit into a different currency, your bank may apply a swap or conversion cost. You get exposed to currency-rate fluctuations.
- No Daily Use: FCNR accounts are strictly provided for term deposits; they cannot be used as savings or current accounts for everyday banking needs.
- Tax Treatment Differs: While the earned interest on FCNR Deposit accounts is free of taxes in India, it may be taxable in an NRI’s country of residence. Check your country's tax rules or consult a tax advisor.
FCNR Deposit Account Eligibility CriteriaÂ
FCNR deposit accounts can be opened by NRIs and OCIs under the FEMA and RBI guidelines. Here are the eligibility criteria to open an FCNR(B) account in India:
- NRIs and OCIs holding valid status proof can open an FCNR deposit account in India.
- Individuals working on oil rigs, serving in UN organizations, or officially posted overseas by the Indian government or public sector undertakings can also open an FCNR account.
- The FCNR Deposit account must be funded with overseas earnings or legally permitted external sources.
- Currencies allowed include USD, GBP, EUR, AUD, CAD, and Japanese Yen.
Difference Between FCNR and NRE Account
Here are some key differences between an FCNR deposit account and a Non-Residential External (NRE) account:
| Factors |
NRE Account |
FCNR Account |
| Currency |
Indian Rupee (INR) |
Permitted foreign currencies |
| Primary purpose |
Managing overseas earnings in India |
Holding foreign earnings in India without converting them into INR |
| Interest taxation |
Fully tax-exempt, subject to applicable conditions |
Fully tax-exempt, subject to applicable conditions |
| Repatriation |
Principal and interest are freely repatriable |
Principal and interest are freely repatriable |
| Exchange-rate risk |
Exposed to INR exchange-rate fluctuations |
No exposure to INR exchange-rate fluctuations |
| Source of funds |
Foreign income/remittances |
Foreign currency earnings/remittances |
| Best suited for |
NRIs who want invest overseas earnings in India |
NRIs who want to retain savings in foreign currency while earning interest |
Conclusion
FCNR deposit accounts are an excellent option for NRI investors who are looking to keep their foreign earnings in India and earn stable returns without exchange-rate risks. However, there are a number of NRI investment plans in India. So, based on your risk appetite and the investment rules for NRIs, you should consider a product that aligns with the long-term financial objectives.
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