RFC account

What is RFC account and how is it helpful for NRIs?

A Resident Foreign Currency account (RFC account) is a special type of savings account that can be opened by NRIs who have returned to India. As the name suggests, this type of account can be used to hold funds in a foreign currency like USD, GBP, EUR etc.

The idea behind this type of account is that when an NRI returns to India and loses the NRI status, any income that has been earned in a foreign country, can be transferred to India and held within the country. If in the future, the individual regains the NRI status, then the funds can be repatriated to a foreign account or the NRE account of the NRI.

The RFC domestic account can be opened with any registered Commercial Bank in India which offers NRI services. So, the regulations related to these accounts are formulated by the Reserve Bank of India (RBI); and the Commercial Banks might have their own rules for the NRI accounts.

Need for RFC bank account

Let us assume that a Non-Resident Indian (NRI) worked for 3 years in a foreign country and earned the income in USD. In this Financial Year (FY), the individual has returned to India and has lost the NRI status for this FY.

Now, suppose that the individual has a savings account in the foreign country, which is used to hold the USD currency that was earned there. Since the individual has returned to India, it can become difficult for him/her to remotely operate and maintain the foreign account.

To solve this problem, the NRI could decide to send the USD to a normal savings account in India. But this USD will be converted to INR currency when the amount is credited to the account. The exchange rate on the date of transfer will be used as a reference for the conversion.

On the other hand, if the NRI wishes to hold on to the USD currency within India, then an alternate option is to open an RFC Domestic account. This special account can be opened in USD currency and the interest will also be earned in USD. So, there is no currency conversion involved when the funds are transferred to India.

Who can open RFC account?

As mentioned before, this type of account can only be opened by an NRI or a Person of Indian Origin (PIO) who has returned to India, on or after 18 April, 1992. Persons returning before 18 April, 1992 are also eligible if they hold a Returning Indians Foreign Exchange Entitlement (RIFEE) permit.

The person should have been a Resident outside of India for a continuous period of at least one year, before returning to India. It is also possible to open a Joint RFC account along with a relative.

The account in India can be used to receive all the savings that were earned and held in a foreign country. In addition, the same account can also be used to receive the pension, gifts, insurance claims or any other payments that are received from the foreign country.

So, this account will allow the individual to easily hold foreign currency, even after he/she becomes an Indian Resident.

An alternate option is to use an Exchange Earners Foreign Currency (EEFC) account. The EEFC account is a type of Current Account and it can be opened by any Indian Resident or Legal Entity, that frequently deals with Foreign Exchange.

Working of RFC account

The Resident Foreign Currency Domestic account can be opened only in some popular foreign currencies like USD, GBP, EUR, JPY etc. The investors can check with the individual banks about the currencies which the bank will accept.

The interest rate that is applicable to such an account will depend on the following factors:
Type of account (Savings, Current, Fixed Deposit etc.)
The Bank with which account is opened
The currency in which the account is opened
Etc.

Withdrawal from RFC account

The investor has the option to withdraw cash from this account or to transfer the funds from the RFC account to a normal savings account that is held in INR currency. The amount will be converted from the foreign currency to INR, based on the exchange rates at that time. These funds can then be used to make local payments within India.

The funds can also be transferred to outside of India for making any foreign payments. In the future, if the individual moves out of India and regains the NRI status, then the entire amount (principal and interest) can be withdrawn from an RFC account and transferred to a foreign account. There are no restrictions on repatriation of these funds to outside of India.

RFC account benefits

The main benefit of RFC bank account is that it provides the possibility to save money in a foreign currency. This eliminates the need for currency conversion when the funds are being transferred from the foreign account to India.

In the future, if the individual regains the NRI status, then the funds can be freely and fully repatriated to outside of India. Again, there might be no need for currency conversion at repatriation time as the funds are already in the foreign currency.

Compared to a foreign account, the RFC account will be easier to manage for the individual after he/she moves back to India. In some cases, this account can also help the investor to earn higher interest income, if the interest rates in India are higher than interest rates in the foreign country where the income was earned.

Tax on RFC account

The interest earned from a Foreign Currency Resident account is usually treated as an income of the investor in India. The tax treatment of this income will depend on the residency status of the investor. There are 2 types of Indian residents for tax purposes:

  1. Ordinary Resident
  2. Resident but Not Ordinarily Resident (RNOR)

For an RNOR, the interest earned from an RFC account is exempt from taxes in India. Whereas the Ordinary Resident will have to pay taxes on the interest amount as per the Income Tax slabs. The bank will also debit a TDS (Tax Deducted at Source) from the interest amount that is paid to Ordinary Residents.

RFC Fixed Deposit

Usually, A normal RFC account refers to a savings account that can be opened in a foreign currency. Some banks also provide the option to open an RFC Fixed Deposit. This is a special type of Term Deposit which can be used to invest the surplus funds and the interest earned in the FD will be higher than the interest earned from a savings account.

Just like an RFC Savings account, the RFC FD allows the individual to invest in a foreign currency. For the duration of the FD, the investor will earn interest at pre-defined intervals. At maturity time, the principal and the interest can be transferred back to the RFC savings account. Or the total amount could be used to open a new Fixed Deposit.

The RFC Term deposit will offer very similar benefits as a Foreign Currency Non-Resident (FCNR) account. But the difference is that the FCNR account is opened for an individual who is still an NRI. Whereas the RFC Fixed Deposit can be opened by an individual who used to be an NRI, and is now a Resident.

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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