FCNR deposits for non-resident Indians: Why hold savings in US dollars in India

The Reserve Bank of India has introduced an initiative to attract Non-Resident Indians (NRIs) to hold their savings in US dollar fixed deposits. This scheme, in effect until September 30, offers returns of over 7% on such deposits, a significant incentive given the diaspora's size of 35 million. The Reserve Bank of India has covered the costs associated with hedging, enabling banks to pass on these savings to customers. The initiative permits borrowers to leverage the funds as well.

An FCNR (B) account allows Indian citizens to hold foreign currency deposits, distinct from the usual Non-Resident External (NRE) accounts that can only hold savings in Indian rupees. Both types of accounts are tax-exempt in India, but any income would be subject to the tax laws of the account holder's country of residence. FCNR accounts also permit free repatriation of savings, deposits, and profits in foreign currencies, unlike NRE accounts.

Holding an FCNR deposit in US dollars can protect savings from fluctuations in the rupee, especially beneficial for NRIs in the UAE where the dirham is pegged to the dollar. The scheme also allows deposits in currencies such as British pounds, euros, Japanese yen, Australian dollars, and Canadian dollars. However, the scheme is specifically for US dollar deposits.

The rates for these deposits range from 5% to more than 7%, depending on several factors including the deposit amount, bank, and tenure. The rates are subject to change at any time once the deposit is booked. Premature withdrawals are not allowed within the first year, and banks may impose further conditions or penalties for early withdrawals depending on the deposit's tenure. Existing deposit holders may not be able to close their accounts early for the same reasons.

UAE residents can send money from the UAE in US dollars for these deposits, albeit with potential additional costs such as transfer fees and intermediary or correspondent bank fees. Opening a new deposit using funds from an existing FCNR account is also possible, though currency exchange charges would apply. The minimum amount for FCNR deposits varies by bank, but usually, it's $1,000 or a similar value in another currency.