NRIs looking to park their money in India face difficulty in choosing the right type of bank account. Unlike plain vanilla savings accounts available to residents, NRIs rather have multiple options, with a slight variation in features. We will discuss foreign currency non-resident bank account (FCNR-B).

 

FCNR (B) scheme was introduced in May 1993 to replace FCNR (A) by the Reserve Bank of India. FCNR (B) accounts are term deposit bank accounts for non-residents and persons of Indian origin. PIOs include overseas citizens of India (OCI) as well. 

 

The features of FCNR accounts are similar to NRE accounts, allowing free repatriability of interest and principal, joint account with NRI and providing loans as well. The certain exceptions are:

 

1. FNCR accounts accept only term deposits. The minimum tenure of the term deposit is one year and maximum can go up to five years.

2. Account is denominated in foreign currency, thus eliminating currency exchange risks.

3. Premature withdrawals are subject to penalties in many banks

4. Recurring deposits are not allowed

 

How to open?

 

FCNR accounts can be opened from overseas by submitting copies of passport and visa of the NRI in addition to bank accounts held overseas, proof of foreign residence and income documents among others.

 

Current Interest Rates:

 

We have taken SBI’s FCNR interest rates (effective 1 May 2019) for one, three and five year’s tenures for illustration. The rates offered by other bank’s FCNR account may be slightly different, and are subject to change periodically.

 

 

 

Taxability:

 

Interest earned is exempted from tax, similar to interest on NRE deposits.

 

Fixed-deposits: Is FCNR (B) better than NRE account?

 

To avoid currency exchange risks, Non-residents who feel that the Indian rupee may devalue quickly in the period they want to invest/park their foreign income, may be better off with FCNR (B) account than an NRE account. 

 

However, the interest rate on FCNR account is quite low compared to NRE, and thus, factoring currency risks, it is better to opt for NRE account instead. 

 

For example, if a non-resident had converted US$10,000 into rupees in June 2014 at the exchange rate of Rs60/$1 and deposited the same in an NRE account, the amount deposited would be Rs6 lakh rupees. SBI was offering 8.50% interest per annum for five-year NRE deposits and 3.60% on FCNR deposits, in the same period. 

 

Considering NRE deposits, at the end of five years, in June 2019, the value of the deposit would grow to Rs9 lakh. If the account holder, converts the Rs9 lakh into US dollars, at current value of Rs69/$1, it would be $13,075, a return of 5.50% per annum in dollar terms. Although the rupee devalued greatly in the five year period, the NRE deposit value outperformed that of FCNR deposit, which were offering interest of only 3.60% per annum.

 

Thus, the outcome is that the NRE account was a better option in the above case. As a thumb rule, if you plan to settle in India in the future then NRE account is better than FCNR account. The scope of FCNR account is limited if we exclude currency risks.

 

Treatment of FCNR for returning NRIs:

 

FCNR deposits are treated as resident deposit accounts on return of accountholder to India. This means, the interest earned on this account becomes taxable for the resident accountholder. However, the interest earned can be tax-free until the returning NRIs tax status in India is ‘resident by not ordinary resident’ (RNOR).

 

On completion of deposit term, the FCNR account is converted to either resident rupee account or resident foreign currency account, at the choice of the account holder.