The Reserve Bank of India (RBI) regulates the types of bank accounts an NRI can open in India under the FEMA (Foreign Exchange Management Act). As per the RBI regulations, an NRI can open three types of accounts, viz. NRE accounts, NRO accounts and FCNR(B) accounts. These different types of bank accounts have their specific benefits and restrictions attached to them, and an NRI can choose between these three accounts as per their banking needs.
To enable NRIs to make an informed decision, the salient features of FCNR accounts are discussed below:
- Only Term Deposit – WhileNRE and NRO accounts can be opened as savings, current, term deposit or recurring deposit accounts, FCNR deposits can be opened only as term deposit accounts. Such deposits can be opened for a period ranging from one year to five years. However, no bank can accept or renew deposits for a period of more than five years. The maturity proceeds of FCNR deposits can be transferred to an NRE or NRO account or even transferred to a bank account outside India.
- Denominated in Foreign Currency – While NRE and NRO accounts are denominated in Indian currency, FCNR deposits are denominated in any specified foreign currencies, viz. US Dollar (USD), Pound Sterling (GBP), Euro (EUR), Japanese Yen (JPY), Australian Dollar (AUD), and Canadian Dollar (CAD). As such, FCNR deposits are helpful if the account holder intends to use such funds for any future expenses in foreign currency, like a child’s education abroad etc.
- Source of Funds – An FCNR accountcan be funded only through an inward remittance from abroad or by transferring the funds from an existing NRE/ FCNR account.
- Interest Rates – The account holder can choose to hold the FCNR deposit in any specified currencies. The interest rates on FCNR deposits depend upon the currency of such deposits. While RBI has prescribed an upper ceiling for such deposits, banks can decide the interest rates on such deposits within that limit. Further, banks can also offer floating rate deposits to the account holders, wherein the interest rate must be linked with an external benchmark rate, and the rate must be reset every six months.
- Repatriation of Funds outside India – There is no restriction on the repatriation of such deposits outside India. Accordingly, the account holder can freely transfer the principal amount and the interest earned thereon abroad without any restrictions.
- Premature Withdrawal – One can break the FCNR deposits prematurely; however, subject topremature withdrawal penalty per the deposit terms. Further, the banks are not allowed to pay any interest on FCNR deposits if such deposits are withdrawn prematurely within one year of deposit. This is in accordance with the deposit rules notified by the RBI wherein the minimum tenor of such deposits is one year. One must also note that converting FCNR deposits into NRE deposits is also considered a premature withdrawal of FCNR deposits. It involves converting foreign currency into Indian currency and then investing as a fresh NRE deposit.
- Joint Operations – An FCNR deposit can be held by an NRI jointly with another NRI only and cannot be held in joint name with another resident Indian.
- Change in Residential Status – If the residential status changes subsequently from non-resident to resident, an individual can continue holding FCNR deposits until their contractual maturity. However, upon maturity of such FCNR deposits, the deposit can be converted into a resident rupee deposit or RFC (Resident Foreign Currency) deposit at the account holder’s option.
- Tax on Interest Income – As per the prevailing Indian tax laws, the interest income on such deposits is tax-free for the NRI account holder. Thus, the account holder is not required to pay any tax on such interest income or file an Income Tax Return (ITR) if there is no other income of the NRI in India.
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.
