Income tax on FCNR accounts & deposits in India

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

Keep reading to know everything about FCNR accounts and how they are taxed.

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 to five years. A loan facility is also available against deposits in FCNR accounts. Any person who is 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 Foreign Exchange Management Act (FEMA), 1999, can open an FCNR account. Non-resident Indians (NRI) and Persons of Indian Origin (PIO) who wish to maintain a fixed deposit account in India can open an FCNR account. 

This account helps NRIs and PIOs retain their money in foreign currency. You can open an FCNR account with single or joint ownership. However, with joint accounts, the account holder also needs to 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 your 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. 

Apart from that, you can use cheques drawn from any bank account in foreign currency. You can also transfer funds from any existing FCNR account to a new FCNR account. Traveller cheques or foreign currency can also be used to open an FCNR account as well.

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 Applicable on Interest Earned from FCNR Accounts in India 

Interest income you earn from an FCNR account is not subject to tax in India. According to the provisions of the Income Tax Act 1961, 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 the 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 interest rates offered by FCNR accounts are lower than NRE or NRO deposit accounts, these accounts offer many benefits. One of them 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 provisions of FEMA, 1999.

Frequently Asked Questions

Are FCNR accounts taxable in India?

No, the interest that you earn from FCNR deposits is tax-free as long as you hold the NRI status or RNOR (Resident and Not Ordinarily Resident) status. This must be as per provisions of the Income Tax Act of 1961. Other than that if you become a resident as per provisions of FEMA, you do not have to pay tax on your FCNR deposit.

Are FCNR accounts exempt from tax?

Yes, interest income earned from an FCNR deposit is exempt from tax as long as you qualify as an NRI or an RNOR.

What is the TDS rate for FCNR accounts?

Under existing Income Tax rules, no TDS or Tax Deducted at Source applies to FCNR accounts. This is because these term deposits are tax-free. 

Which is better, FCNR or NRE?

NRE is a fixed deposit account in which NRIs deposit the amount they earn in foreign currency in Indian banks. This amount gets converted into Indian rupees. Therefore, if the value of rupees depreciates further at the time of maturity or repatriation, they will lose money. However, with FCNR deposits, the amount will remain in foreign currency; therefore, there are no risks relating to exchange rate fluctuations.

Can I transfer money from an NRE to an FCNR account?

Yes, transferring money from an NRE to an FCNR account is possible. While opening an FCNR account, you can transfer money from your NRE account.