Income Tax on FCNR Accounts & Deposits in India

Individuals move from one country to another for various reasons, ranging from higher education to career opportunities. Suppose you are an Indian who resides outside India. In that case, you can maintain multiple accounts with Indian banks, such as NRE (Non-Resident External) accounts, NRO (Non-Resident Ordinary) accounts, RFC (Resident Foreign Currency) accounts, etc. One of them is the FCNR account.

What is the Full Form of FCNR?

FCNR stands for Foreign Currency Non-Resident Account. These are term deposit accounts and not savings accounts. You can open this account in only permitted foreign currencies freely converted into Indian rupees. 

FCNR accounts allow people to deposit money earned in a foreign currency. As the money is retained in foreign denominations, it is safeguarded from the risk of exchange rate fluctuations. Moreover, funds in these accounts are fully repatriable, meaning you can transfer them to any foreign country.

All major banks in India give the option to open an FCNR account. FCNR accounts hold customer deposits in currencies such as US Dollars, Japanese Yen, Pound Sterling, Canadian Dollars, Euro, Australian Dollars, etc.

You can open this account for a period between one and five years. A loan facility is also available against deposits in FCNR accounts. Any person unsure of where they want to utilise or invest their earnings in India from any other country can keep their money in an FCNR account for the time being.

Who Can Open an FCNR Account in India? 

Any Indian citizen and non-resident under the Foreign Exchange Management Act (FEMA), 1999, can open an FCNR account. Non-resident Indians (NRI's), Persons of Indian Origin (PIO's), or Overseas Citizens of India (OCI's) who wish to maintain a fixed deposit account in India can also open an FCNR account.

This account helps NRI's and PIO's retain their money in foreign currency. You can open an FCNR account with single or joint ownership. However, with joint accounts, the holder must also be an NRI. You can make your relative a joint account holder on a 'former or survivor basis'. Even a nomination facility is available for FCNR accounts, but the nominee does not have to be an NRI. 

There are many ways you can open an FCNR account. You can either open your FCNR account with money transferred through banking channels outside India. Other than that, you can also transfer money from your existing NRE Account.

 You can also use cheques drawn from any bank account in a foreign currency. You can also transfer funds from any existing FCNR account to a new FCNR account. Traveller's cheques or foreign currency can also be used to open an FCNR account.

Factors to be Considered Before Opening an FCNR Account

There are various options available for NRI's wanting to open an account in India, like NRE Fixed Deposit Account, Non-Resident Ordinary (NRO) Savings Account, and Foreign Currency Non-Resident (FCNR) Fixed Deposit Account, etc. There are various factors that an NRI should consider before opening an account in India, they are as follows:

• Source: Is it necessary for the funds in the account to be sourced solely from abroad, or can they be from India as well.
• Family: Can a relative or family member in India manage the account using a mandate card issued by the bank.
• Currency: Currencies that are accepted for opening an account and risks associated with currency rate fluctuations.
• Taxation: Taxation implications on principal and interest amount.
• Repatriation: Effects and ease of repatriation of the funds to their source country.

An FCNR account is a term deposit account.  It can be opened overseas by providing copies of the account holder's passport, foreign address, overseas bank account details and income details.

FCNR Interest Rates 

For any bank, the interest rates on FCNR accounts are different from the interest rates for regular or senior citizen depositors. The interest rate is also different for every currency held by these accounts. 

Interest is paid on an FCNR account only after a maturity period of 1 year. Therefore, if you prematurely withdraw your money before 1 year, you will not receive any interest. 

However, interest rates on FCNR accounts are typically lower than for Indian resident accounts. However, they are usually higher than what is offered in their country of residence, as there is no risk from changes in the exchange rate.

Interest from an FCNR account, along with the principal amount, is fully repatriable. In case of the primary NRI account holder's unfortunate demise, the amount can be transferred to a nominee's account without any taxes or charges.

 You can credit the interest you earn on your FCNR account into your NRE or NRO (Non-resident Ordinary) account. You can freely remit this money outside India without having to take any permission from the Reserve Bank of India (RBI).

Income Tax on Income from FCNR Account

Interest income you earn from an FCNR account is not subject to tax in India. According to the Income Tax Act 1961 provisions, you are exempt from tax payment until you hold the status of a Non-resident Indian or a Resident and Not Ordinarily Resident. After maturity, you can transfer the amount to any RFC or resident Rupee account without having to pay any tax.

However, interest earned from an FCNR account might be taxable in the country where an NRI resides. This, however, depends on the laws and regulations of the country where a person resides. 

Once your residence status changes from NRI to an ordinary resident, interest on your FCNR deposit will be taxable. If you become a resident under the FEMA Act, you will not have to pay any tax on your interest on your FCNR deposit when you return to India till maturity.

Final Words

Although FCNR accounts offer lower interest rates than NRE or NRO deposit accounts, they offer many benefits. One is that the interest earned is completely tax-free. Other benefits include their repairability and negligible exchange rate risks.

While calculating your tax liabilities, you need to take into consideration your residential status according to the provisions of the Income Tax Act 1961. Other than that, the treatment of your income depends on the type of account you hold as per the provisions of FEMA, 1999.