Along with other reasons due to inflation differentials between India and the US, the Indian rupees generally depreciates against the US $ in the long run. The constant long term depreciation in Indian Rupees results in, foreign currency denominated products, generally giving higher returns in terms of Indian rupees over the years. In addition to real estate and Indian equity investment in FCNR also offers a good safe, and liquid investment opportunity to NRIS. The FEMA (Foreign Exchange Management Act) allows you to have bank account in permitted foreign currencies. These are called Foreign Currency Non Resident (FCNR) account. Let us discuss various features of FCNR account.
Basic features of the account
The FCNR account can only be opened in the form of fixed deposit and not in the form of a current account or a saving account which is permitted in case of NRE and NRO account. Strictly speaking FCNR is a subset of NRE account. The FCNR account can only be opened in “permitted foreign currencies” which are freely convertible in Indian rupees. These include various foreign currencies like Singapore Dollars, Australian Dollars, USD, Sterling pound, Canadian Dollar, Japanese yen etc.. These accounts can be opened for a period ranging between one year and five years. In case of premature withdrawals you have to pay penalty for such premature withdrawal in terms of reduction in the interest rate which you will get. However in case the deposits under FCNR are liquidated before completion of one year, you are not entitled to any interest on the FCNR deposits.
You can obtain loan against your FCNR account for personal or business needs but not for the purpose of lending or for acquiring agricultural land or for acquiring any real estate business. However you can use the money for acquiring any flat or house for your own residence in India.
Who and how of opening FCNR account
Any person who is an Indian Citizen and a non resident for FEMA purposes can open the FCNR account. Moreover non Indian Citizen and person of Indian Origin are also allowed to open the FCNR account. Both these categories are collectively referred to as NRI under FEMA. The FCNR account can be opened in single or joint names but in case of joint account the second holder also needs to be a an NRI. However your relatives can also become joint account holder on “former or survivor basis”. You can appoint nominee for your FCNR account like your other bank accounts and the nominee need not be an NRI. The FCNR account can be opened with money transferred in foreign currency through banking channel outside India or by transfer from your NRE account or any other FCNR account or by way of a cheque drawn on any bank account maintained in foreign currency. It can also be opened by tendering traveller cheques or foreign currency while travelling to India.
It is not necessary for you to be physically present in India for opening the FCNR account. The NRIs can open this account in the overseas branch but you will have to submit some basic documents like copy of passport, proof of foreign address etc.
Interest rate and Exchange rate
The rate of interest for each of the currency is different for FCNR account. The interest rate on FCNR account is generally lower than the rate for deposits of Indian residents. However the rate of interest on the FCNR accounts is generally higher than those offered on deposits in their country of residence. Since these accounts are opened in foreign currency, there is no risk in respect of changes in the exchange rate of the currency of the deposit and Indian currency. As the exchange rate risk is eliminated and the rate of interest offered is higher than those offered by their home countries, these deposits offer a better risk free investment opportunity to the NRIs. The interest credited in FCNR account and the principal amount in FCNR account is fully repatriable and can be freely remitted outside India without any permission from RBI. The interest can also be credited to your NRE or NRO account .
Taxation of the interest on FCNR
The interest on FCNR account is exempt from tax in India but may be taxable in country of your residence depending on your residential status under the respective tax laws. In case you become a resident under FEMA, in case you return back to India for good, the interest on FCNR account will still be exempt till the maturity of the FCNR account. This is in contrast to the interest on NRE account which remains tax exempt till you are a non resident under FEMA laws and becomes taxable immediately on becoming resident for FEMA purposes.
I am sure this discussion will help you understand one more investment opportunity in India.
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)
By Balwant Jain (CA, CS and CFP)The author is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. Views are personal., He can be reached at email@example.com and @jainbalwant