What Is an FCNR Deposit? Features, Benefits & Tax Rules

Understanding FCNR Deposits

An FCNR (Foreign Currency Non-Resident) deposit is a fixed-term deposit account in India that allows Non-Resident Indians and Persons of Indian Origin to hold funds in designated foreign currencies. The primary purpose of this account is to mitigate currency fluctuation risks, as the funds are not converted into Indian Rupees. This feature provides a layer of stability for foreign earnings, protecting the deposit from potential depreciation of the Indian Rupee against the foreign currency. Unlike Non-Resident External (NRE) accounts, where foreign currency is converted to Indian Rupees upon deposit, FCNR accounts maintain the original foreign currency denomination throughout the deposit tenure. This fundamental difference is significant for NRIs who prefer to keep their savings in a stable foreign currency. FCNR deposits are offered by authorized banks in India, providing a secure and regulated environment for these foreign currency holdings.

Key Features and Operational Aspects

Only Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) are eligible to open FCNR accounts. Proper documentation, including proof of NRI/PIO/OCI status, is typically required during the account opening process.

FCNR deposits can be held in several major foreign currencies, including the US Dollar (USD), British Pound Sterling (GBP), Euro (EUR), Japanese Yen (JPY), Canadian Dollar (CAD), and Australian Dollar (AUD). Some banks may also offer deposits in other currencies like the Singapore Dollar (SGD), Swiss Franc (CHF), Danish Krone (DKK), and Hong Kong Dollar (HKD). This multi-currency option allows depositors to choose the currency that best aligns with their income source or financial strategy.

These deposits are fixed-term accounts, typically with tenure options ranging from one year to five years. The interest rates on FCNR deposits are generally fixed for the chosen tenure and are often linked to international market rates for the respective currency. Interest is paid in the same foreign currency as the deposit, further protecting against exchange rate fluctuations.

A significant feature of FCNR deposits is their full and free repatriability. Both the principal amount and the interest earned can be transferred out of India without any restrictions or limits. This ensures liquidity and accessibility of funds for the account holder globally. Joint FCNR accounts can be opened with another NRI or with a resident Indian relative on a “former or survivor” basis, provided the primary account holder is an NRI/PIO.

Tax Implications of FCNR Deposits

Interest income earned on FCNR deposits is exempt from income tax in India for Non-Resident Indians. This exemption applies as long as the account holder maintains their non-resident or Resident but Not Ordinarily Resident (RNOR) status under the provisions of the Income Tax Act, 1961. There is no Tax Deducted at Source (TDS) on FCNR deposits in India due to this tax-exempt status.

Wealth tax was previously exempt but has since been abolished. If funds from an FCNR account are gifted to a resident Indian, the recipient may be subject to Indian gift tax laws, depending on the amount and relationship. While succession laws apply, the deposit itself is generally not subject to Indian estate duty for NRIs.

It is important for FCNR deposit holders to understand that while the interest income may be tax-exempt in India, it might be taxable in their country of residence. Tax laws vary significantly between countries, and many nations tax their residents on their worldwide income. Therefore, consulting a qualified tax advisor in the country of residence is advisable to understand specific tax obligations and any potential benefits from Double Taxation Avoidance Agreements (DTAAs).