A popular investment choice among non-resident Indians (NRIs) is fixed deposits (FDs). This investment option is user-friendly, offers guaranteed returns, and adheres to transparent regulations. During its December Monetary Policy Committee (MPC) meeting, the Reserve Bank of India raised the interest rate cap on Foreign Currency Non-Resident Account FCNR (B) deposits to overnight Alternative Reference Rate (ARR) plus 400 basis points for maturities ranging from 1 year to less than 3 years.
The decision was made to attract foreign currency deposits from abroad, and the revised rates will remain in effect until March 2025. The previous limit was ARR + 200 basis points, making it a noticeable rise.
The RBI has said: "It has been decided to increase the interest rates ceiling on fresh FCNR(B) deposits raised by the banks with effect from December 06, 2024 as under:
Period of Deposit Ceiling rate
1 year to less than 3 years Overnight Alt Reference Rate for the respective currency/ Swap plus 400 basis points
3 years-above up to and including 5 yrs Overnight Alt Reference Rate for the respective currency/ Swap plus 500 basis points
What are FCNR (Foreign Currency Non-Resident) Accounts?
A Foreign Currency Non-Resident (Bank) account enables individuals to hold a fixed deposit in India in freely convertible foreign currencies for a duration of one to five years. By maintaining the account in a foreign currency, it safeguards the deposited funds from currency fluctuations throughout the deposit's tenure. Similar to a Non-Resident External (NRE) bank account, both the funds held in this account and the interest accrued are exempt from taxes in India.
Benefits of FCNR (Foreign Currency Non-Resident) Accounts
As an NRI looking to maintain a fixed deposit account in India, you have the option to choose an FCNR Account. This account allows you to securely save money earned overseas in foreign currency.
FCNR accounts are advantageous as they allow for funds to be held in foreign currency, minimizing exposure to exchange rate risks. Both the principal amount and interest can be repatriated, and the interest earned is tax-exempt in India.
By maintaining the account in a foreign currency, your funds are protected from currency fluctuations during the deposit term.
Most banks offer FCNR deposits in major currencies such as US Dollars, Pounds Sterling, Euro, Japanese Yen, Australian Dollars, and Canadian Dollars.
Features of FCNR accounts
Early Withdrawal: As per SBI website, interest will not be payable if the deposit is withdrawn before one year. There is no penalty for withdrawing the deposit after one year, but the interest paid will be based on the rate applicable for the duration the deposit was held with the Bank. The interest rate will be determined by the rate available on the deposit date.
Principal Amount: The principal amount of your FCNR deposit, as well as the interest earned, is fully repatriable, meaning it can be transferred or moved freely. Additionally, an overdraft facility can be accessed on your FCNR Term Deposit Account.
Type of Account: FCNR Accounts are Term Deposit Accounts and not Savings Accounts.
Opening an Account: Transfer funds from your existing Non-Resident External (NRE) Account to open an FCNR Account.
Tax Benefits: Interest earned on FCNR Accounts is tax-free in India.
Repatriation: Both the principal amount and the interest earned are fully repatriable.
Overdraft Facility: You can also avail an overdraft facility on your FCNR Term Deposit Account.
Tax implications and KYC compliance for NRIs
KYC Compliance: Non-Resident Indians (NRIs) must complete Know Your Customer (KYC) requirements before opening Fixed Deposit (FD) accounts. This includes providing important documents such as passport copies, visa details, and proof of overseas address.
Tax Implications: The interest earned on NRE and FCNR accounts is tax-free in India. However, interest accrued on NRO accounts is subject to a Tax Deducted at Source (TDS) rate of 30%, along with applicable surcharge and cess.
Deposit Tenure and Withdrawals: The tenure of FDs may vary from 1 to 10 years depending on the bank. NRIs have the option to make premature withdrawals, but it's important to be aware that there may be a penalty imposed by the bank for early withdrawal.
Double Taxation: Despite the exemption of interest earned on NRE and FCNR accounts from tax in India, it is advisable for NRIs to assess their tax liabilities in their country of residence.
Early Withdrawal Fees: Prior knowledge of penalties for premature withdrawals and the lock-in periods of specific investment schemes is crucial. Fixed deposits present NRIs with a secure and reliable option for growing their savings while residing overseas.
Maximising Benefits: By understanding regulatory requirements and selecting the appropriate account type based on their financial goals, NRIs can optimise the advantages of these deposits. For NRIs contemplating investment in fixed deposits, it is recommended to review the prevailing interest rates offered by private sector banks for FDs with tenures of up to 5 years.