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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

FCNRs attractive for NRIs who don’t remit

Interest offered may be attractive but the interest income will be taxable in their home nations

Earlier this month, the Reserve Bank of India (RBI) announced a special window to swap foreign currency non-resident (FCNR-B) deposits with a tenor of minimum three years at a fixed rate of 3.5%. This will allow banks to exchange dollars deposited under FCNR-B deposits with rupees; the window is open till 30 November. So on top of getting rupees in exchange of dollars, which banks can lend in the domestic market, they will earn 3.5% interest from RBI.

Banks are now making efforts to get as much deposits as they can. “We are targeting a minimum of 1,000 crore till the window is open," said A. Surendran, general manager (retail and international business), Federal Bank. Though Federal Bank does not have much presence in non-Gulf Cooperation Council countries, it is using alliances and online routes to attract FCNR-B deposits. As per reports, banks may be able to garner deposits to the tune of $10 billion, providing much comfort to the rupee.

FCNR-B deposits can be maintained by non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) in any of the six currencies—US dollar, pound sterling, euro, Japanese yen, Australian dollar and Canadian dollar—allowed under the scheme. The deposits are maintained in the currency it is deposited in and so the conversion risk can be avoided here.

“Since there is no conversion risk, people who do not want to bring back money to India may find this attractive," said Surya Bhatia, managing partner, Asset Managers, a New Delhi-based financial planning firm. Bhatia added that since countries with low inflation usually have low interest rates, FCNR-B deposits will be an attractive proposition as compared with what is offered in the home countries of NRIs or PIOs.

“We have been pushing a bit and there is tremendous growth in inflows in such deposits," said deputy general manager for NRI services of a large state-run bank, on condition of anonymity.

However, not too many retail customers are expected to put money in these deposits. “High net worth individuals who have the resources to use leveraged money are the ones who will be more interested," said Surendran. He said retail customers would instead put money in non-resident external accounts, which accepts deposits in rupee. This is true for those who want to remit money to India.

But remember that though the deposits are interest-free in India, that may not be the case in the country of residence of the NRI or PIO. “Say in Singapore, the tax rate could be 15-20% and so the interest income earned will be taxed accordingly. NRIs need to factor that in before making such deposits," said Bhatia. He added that retail customers may not see FCNR-B deposits as a long-term asset.

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