Summary of this article
FCNR Deposits
Principal and interest remain in foreign currency till maturity
FCNR interest income is tax-free for NRIs and RNORs
Full repatriability makes FCNR deposits attractive for overseas investors
Bank deposits are finding favour again as many investors return to safer options in a volatile market, according to news reports. But for NRIs, the choice is not just between one bank and another, or one interest rate and another. The bigger issue is currency.
A rupee fixed deposit may look attractive on paper. However, if the rupee falls by the time the money is repatriated, part of the return can get wiped out in conversion. FCNR(B) deposits are useful in such cases because the money is kept in a foreign currency, helping Non-Resident Indians (NRIs) avoid the risk of losing value due to exchange-rate movements.
What Is An FCNR(B) Deposit?
“FCNR(B), or Foreign Currency Non-Resident (Bank) account is a fixed deposit (FD) account that allows NRIs and Overseas Citizens of India (OCIs) to keep their savings in foreign currencies like US Dollar (USD), British Pound (GBP), Euro (EUR), Australian Dollar (AUD), Canadian Dollar (CAD) and Japanese Yen (JPY) with Indian banks,” says Adhil Shetty, CEO, Bankbazaar.
One key feature of an FCNR-B is that the term deposits can be maintained in foreign currencies throughout their tenure. Along with the principal, the interest is also paid in the same currency upon maturity, unlike the standard Indian fixed/term deposits, which are accepted only in Indian Rupee (INR).
Any depositor identifying as an NRI or Overseas Citizenship of India (OCI) can open an FCNR deposit through inward remittances from their overseas accounts or directly transfer funds from their Non-Resident External (NRE)/FCNR accounts in Indian banks.
Why Currency Protection Matters
The deposits are available for tenures ranging from one year to five years. “They are generally used by overseas Indians who want to earn fixed returns while retaining their funds in foreign currency. Since FCNR deposits are maintained in foreign currency throughout the tenure, investors can earn returns without taking on rupee depreciation risk. It offers investors full repatriability of both principal and interest, making it a convenient choice for overseas investors,” says Adhil Shetty, CEO, Bankbazaar.
Agrees Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA), and founder and chief investment advisor of SahajMoney, a financial planning firm, “These deposits are held in the foreign currency hence the deposit holder is protected from currency fluctuation risk of the Indian Rupee against that currency, as at the time of maturity both the principal and the interest are settled in that same foreign currency.
Let us take an example. “Assuming an NRI places $25,000 in an FCNR deposit, the funds will remain in US dollars until their maturity. The depositor accrues interest in dollar valuation, and both the principal and interest are repaid in US dollars regardless of the fluctuations in the rupee-dollar exchange rate during the period. FCNR deposits remain an attractive option for NRIs and OCIs seeking predictable returns while preserving the value of their savings in foreign currency,” says Shetty.
Tax Treatment For NRIs In FCNR Accounts
“As per Indian income tax regulations, both the interest income as well as the principal amount in FCNR accounts are exempt from income tax for NRIs as well as for Resident but Not Ordinarily Resident (RNOR),” says Kumar.
The maturity proceeds of an FCNR(B) deposit, consisting of the principal amount and interest, are fully repatriable. The principal is the depositor’s own capital and hence is not taxed on repayment. The tax exemption is primarily used for the interest received, provided the depositor is a non-resident.
But the tax treatment can change if the residential status of the account holder changes, and he becomes a resident in India. “In those situations, investors need to consult a tax advisor to find out the rules that apply. FCNR deposits are still one of the most tax-efficient and currency-protected fixed-income options for NRIs and OCIs wishing to get exposure to the Indian banking system,” says Shetty.
FAQs
What is an FCNR(B) deposit?
An FCNR(B) deposit is a fixed deposit that allows NRIs and OCIs to keep money in foreign currencies with Indian banks.
How does an FCNR(B) deposit protect NRIs from currency risk?
Since the deposit remains in foreign currency, both principal and interest are repaid in the same currency, reducing the risk of rupee depreciation.
Are FCNR(B) deposits taxable in India?
For NRIs and RNORs, the principal and interest earned on FCNR(B) deposits are generally exempt from income tax in India.
