Advantage NRIs: Higher interests on NRI deposits till March 2025; check details

The Reserve Bank of India has stated that the interest rate ceiling on Foreign Currency Non-Resident Account FCNR(B) deposits has been raised to overnight Alternative Reference Rate (ARR) plus 400 basis points for maturities between 1 year and less than 3 years.

This decision was announced during the RBI's monetary policy meeting on December 06, to entice foreign currency deposits from abroad. These new rates will remain in effect until March 2025, marking a significant increase from the previous limit of ARR + 200 basis points.

The central bank has elevated the interest rate ceilings on FCNR(B) deposits to attract more capital inflows.

“In order to attract more capital inflows, it has been decided to increase the interest rate ceilings on FCNR(B) deposits. Accordingly, with effect from today (December 6, 2024), banks are permitted to raise fresh FCNR(B) deposits of 1 year to less than 3 years maturity at rates not exceeding ARR plus 400 bps and deposits with maturity between 3 to 5 years at rates not exceeding ARR plus 500 bps. This relaxation will be available till March 31, 2025,” the RBI noted in its policy statement. 

NRIs looking to open a fixed deposit account in India, can consider choosing an FCNR Account. This account enables them to deposit and save money earned in foreign currency while living abroad.

"This is an opportunity for NRIs to invest in India," Governor Shaktikanta Das said during the media interaction. 

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 Alternative Reference Rate for the respective currency/ Swap plus 400 basis points
3 years-above up to and including 5 yrs  Overnight Alternative Reference Rate for the respective currency/ Swap plus 500 basis points

Advantages of FCNR (Foreign Currency Non-Resident) Accounts

In FCNR accounts, funds are held in foreign currency to mitigate exchange rate risks. Both the principal amount and interest can be repatriated, and the interest earned is exempt from taxes in India. 

By maintaining the account in a foreign currency, your funds are shielded from currency fluctuations throughout the deposit term. 

Most banks book FCNR deposits in the following currencies in US Dollars, Pounds Sterling, Euro, Japanese Yen, Australian Dollars, and Canadian Dollars.

Non-Resident External (NRE) Account

NRE accounts facilitate deposits in a foreign currency, which are subsequently converted into Indian rupees. Both the principal amount and interest can be freely repatriated, with the interest earned being tax-exempt in the majority of cases.

Non-Resident Ordinary (NRO) Account

NRO accounts are designed for income acquired in India, such as rent or dividends. The interest earned is subject to taxation based on the relevant tax bracket.

Things to note

Tenure: ICICI Bank website says: "An FCNR (B) account lets you maintain a fixed deposit in India in freely convertible foreign currencies for a tenure ranging from one to five years."

Premature withdrawal: The SBI website says: "No interest is payable, if the deposit is withdrawn before one year. No premature penalty for the deposit withdrawn after completion of one year. However, interest shall be paid at the rate applicable for the period deposit has remained with the Bank. Interest will be paid at the rate available on the date of deposit.

According to the HDFC Bank, "The Principal amount of your FCNR deposit and the interest you earn thereon is fully repatriable, e., it is completely transferable. You can also avail an overdraft facility over your FCNR Term Deposit Account."

Tax implications and application

KYC Compliance: Non-Resident Indians (NRIs) are required to fulfill Know Your Customer (KYC) requirements before opening Fixed Deposit (FD) accounts. This involves submitting essential documents including passport copies, visa details, and proof of overseas address.

Tax Implications: Interest earned on NRE and FCNR accounts is tax-exempt in India. On the other hand, 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 between 1 to 10 years among different banks. NRIs have the flexibility to make premature withdrawals; however, it is essential to note that the bank may impose a penalty for early withdrawal.

KYC Compliance: Non-Resident Indians (NRIs) are required to fulfill Know Your Customer (KYC) requirements before opening Fixed Deposit (FD) accounts. This involves submitting essential documents including passport copies, visa details, and proof of overseas address.

Tax Implications: Interest earned on NRE and FCNR accounts is tax-exempt in India. On the other hand, 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 between 1 to 10 years among different banks. NRIs have the flexibility to make premature withdrawals; however, it is essential to note that the bank may impose a penalty for early withdrawal.

Double Taxation: Although interest earned on NRE and FCNR accounts is exempt from tax in India, NRIs should assess their tax obligations in their country of residence.

Withdrawal Penalties: It is important to be aware of any penalties for early withdrawals and the duration of lock-in periods for specific investment schemes. Fixed deposits can provide NRIs with a secure and dependable method to grow their savings while living abroad. 

By familiarising themselves with the regulations and selecting the appropriate account type based on their financial objectives, NRIs can maximize the benefits of these deposits. For NRIs considering investing in fixed deposits, it is recommended to review the current interest rates offered by private sector banks for FDs with tenures of up to 5 years.