FCNR(B) ACCOUNT: FEATURES, BENEFITS AND IMPORTANCE FOR NRIS

Why In News?

The Reserve Bank of India (RBI) opens a special concessional swap window to absorb hedging costs for fresh 3-5 year FCNR(B) deposits, aiming to boost NRI dollar inflows and stabilize the depreciating Indian Rupee.

What is an FCNR(B) Account?

• FCNR(B) stands for Foreign Currency Non-Resident (Bank) account.
• Banks maintain these accounts strictly as fixed-term deposits for individuals living outside India.
• Investors retain their deposited funds in specified foreign currencies rather than converting them into Indian Rupees.

Eligibility Criteria

• Non-Resident Indians (NRIs) hold the primary eligibility to open these accounts.
• Overseas Citizens of India (OCIs) and Persons of Indian Origin (PIOs) also qualify to maintain these term deposits in India.
• Joint accounts require the primary holder and the joint holder to possess NRI status, though resident relatives can act on a 'former or survivor' basis.

RBI Regulatory Framework

• The Reserve Bank of India (RBI) regulates these accounts under the Foreign Exchange Management Act (FEMA), 1999.
• Banks accept these deposits strictly as term deposits; they do not offer savings or current account variants for FCNR(B).
• RBI periodically exempts banks from maintaining Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on these funds to reduce the cost of raising foreign currency resources.

Key Features

Foreign Currency Deposits

• Account holders park their overseas earnings directly in foreign currency.
• Banks do not convert the principal or the accrued interest into Indian Rupees, preserving the original currency denomination.

Protection from Exchange Rate Risk

• Depositors completely avoid the exchange rate risk associated with currency fluctuations.
• NRIs suffer no financial loss if the Indian Rupee depreciates against the US Dollar at the time of maturity.

Fixed Deposit Nature

• Banks strictly operate FCNR(B) accounts as term deposit accounts.
• Depositors lock their funds for specific tenures, ranging from a minimum of one year up to five years.
• Banks pay zero interest if the depositor makes a premature withdrawal before the completion of one year.

Repatriability of Funds

• Account holders enjoy full repatriability on both the principal amount and the accrued interest.
• NRIs freely transfer these funds back to their host country without requiring specific permissions from the Reserve Bank of India.

Permitted Currencies

Authorized Dealers accept FCNR(B) deposits in freely convertible major global currencies.

• US Dollar

• Pound Sterling

•  Euro
• Japanese Yen
• Australian Dollar

Benefits of FCNR(B) Accounts

Hedge Against Currency Fluctuations

• Investors use FCNR(B) accounts as a primary hedge against currency volatility.
• Deposits remain completely immune to the depreciation of the rupee, preserving wealth value in hard currency terms.

Tax Advantages for NRIs

• The Government of India completely exempts the interest earned on FCNR(B) deposits from Income Tax.
• Banks do not deduct Tax Deducted at Source (TDS) on the interest income for individuals holding NRI or RNOR status.

Stable Foreign Currency Returns

• Account holders lock in stable returns that often outpace the domestic deposit rates in their host nations.
• Banks pass on regulatory benefits to depositors, sometimes offering up to 7% on dollar deposits owing to special RBI swap facilities.

Conclusion 

FCNR(B) deposits act as a macroeconomic stabilizer for India by offering NRIs a lucrative, tax-free haven that concurrently strengthens the nation's forex reserves and external stability.

Source: ECONOMICTIMES