FCNR account

What is FCNR account and how is it different from other accounts for NRIs?

A Foreign Currency Non Resident account (FCNR account) is a special type of Fixed Deposit account in which the funds can be held in a foreign currency. This type of account can be opened by Non-Resident Indians (NRIs) to hold their foreign income in India.

The funds that are deposited in the FCNR account are fully repatriable. This means that at maturity time, the entire amount (principal and earned interest) can be fully and freely transferred to outside of India. Of course, it is also possible to use the maturity amount to open a new FCNR Fixed Deposit.

This type of Fixed Deposit can be opened with any registered Commercial Bank in India which offers NRI services. So, the guidelines and regulations related to these accounts are formulated by the Reserve Bank of India (RBI). In addition, the Banks might have their own rules for the NRI accounts.

This account is also known as a Foreign Currency Non-Resident (Bank) account / FCNR(B) account / FCNRB account.

Features of FCNR account

Let us assume that a Non-Resident Indian (NRI) earns all the income in EUR currency. If the NRI would like to hold some of this surplus EUR currency in India, then a safe investment option is a Foreign Currency Non-Resident account with an Indian bank.

The money which has been earned in EUR can be transferred to the new Fixed Deposit account in India. Since this account will also be opened in EUR currency, there will be no currency conversion involved at transfer time. The FCNR FD can also be opened by using the funds that are already available in the NRE account of the NRI.

Based on the investment duration, the NRI would periodically earn interest on the amount. This interest is usually re-invested in the account, for the remaining duration of the Fixed Deposit.

At maturity time, the NRI has the option to transfer the entire amount to outside of India or to transfer the amount to an NRE account in India. Alternately, the NRI could also decide to open a new FCNR Deposit with all (or some) of the maturity amount.

In this example, If the NRI transfers the matured amount (earned in EUR) to a foreign account which is also held in EUR currency, then there will be no need for currency conversion at maturity time either.

Terms of the Deposit

When opening the FCNR Fixed Deposit, the NRI would need to select the maturity of the deposit in advance. Most banks offer FCNR deposits with a maturity of at least 1 year and a maximum maturity period of 5 years.

The FCNR interest rates will depend on the bank with which the account is being opened. The rate will also depend on the time period of the Fixed Deposit and the currency in which the deposit is being made.

Some of the popular currencies in which the FCNR account can be opened are: USD, GBP, EUR, JPY, AUD, CAD etc. If the Fixed Deposit is cancelled before the maturity, then some penalty charges might be applicable on the withdrawal.

Need for FCNR account

There are multiple ways for an NRI to hold their foreign income in India. The most popular methods for NRIs to save money in India are: Non-Resident External (NRE) account and Non-Resident Ordinary (NRO) account.

But both these accounts can only be opened in INR currency. So, the NRI will be exposed to the Foreign Exchange risk when transferring the funds between India and the country of residence.

Example: The NRI might transfer USD 5,000 to India at an exchange rate of: USD 1 = INR 90. Suppose that over the years, the invested amount (INR 4,50,000) in the account grows to INR 5,00,000.
But if the exchange rate changes to: USD 1 = INR 100 (for example), then the NRI will only receive: 5,00,000 / 100 = USD 5,000, when transferring the funds out of India. So, the net return on the investment will be Zero in this example.

An FCNR account removes the Foreign Exchange risk by allowing the NRI to open the account in a foreign currency. So, there is no need for currency conversion when the funds are being transferred.

FCNR account benefits

As already explained above, the main benefit of FCNR account is that it is opened in a foreign currency. This eliminates the need for currency conversion when the funds are being transferred between the FCNR account and the foreign account.

Also, a Non Resident Foreign Currency Account can help the NRIs to earn higher interest income on their surplus funds. The account will be beneficial if the interest rates in India are higher than the interest rates in the country where the NRI has earned the income. Moreover, these types of Fixed Deposits are a very safe investment option for NRIs who wish to invest in India.

Whenever needed, the principal and the interest from the FCNR account can be transferred back to the original country. The funds available in this account are freely transferable and they can be repatriated without any limits or restrictions that are applicable to an NRO account.

Another benefit that is available for such an account is that some banks offer Overdraft facilities, loans, advances etc. against the balance in the foreign currency Fixed Deposit. However, this type of loan is given in INR and it can only be used to make local payments in India.

Tax on FCNR account

The interest earned from a Foreign Currency Non Resident Fixed Deposit is exempt from taxes in India. This means that there will be no need for the bank to deduct TDS (Tax Deducted at Source) from the interest, because there is no tax payable.

However, the NRI might need to pay taxes in their country of residence for the income that is earned from such an account. So, in terms of tax treatment, the FCNR account will offer same benefit as an NRE Fixed Deposit. But the difference is that the NRE Fixed Deposit is held in INR currency.

Disadvantage of FCNR account

Like all Fixed Deposits, the funds in the Foreign Currency Non-Resident account will be blocked for the duration of the investment. It is possible to cancel the Fixed Deposit and withdraw the amount before the maturity date. But the entire interest amount might not be received in such a case and the NRI might even have to pay penalty charges.

The FCNR accounts are considered to be a very safe investment option and the interest rate will be decided by the bank. However, there is a risk of repayment if the account is opened with a weak bank, which might fail in an economic downturn.

The interest rate will also depend on the duration of the deposit and the currency in which the deposit is being made. For example, the interest rate offered on a USD account will be higher than the interest rate that is offered for a JPY account.

Disclaimer

  • This page is for education purpose only
  • Some information could be outdated / inaccurate
  • Investors should always consult with certified advisors and experts before taking final decision
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