The Reserve Bank of India (RBI) has given a big gift to Non-Resident Indians (NRIs). The central bank has sweetened the rules for Foreign Currency Non-Resident (FCNR) deposit accounts. After this new change, now NRIs can earn handsome interest of up to 7 percent by keeping their foreign earnings or dollar savings in fixed deposits (FD) in Indian banks. Since it is extremely difficult to get such high secure returns on the dollar globally, it is being considered a jackpot for NRI investors. Let us understand in simple language what this whole matter is, what is FCNR and what effect it will have on the common people and the economy of the country.
What is FCNR (B) account?
FCNR (Foreign Currency Non-Resident) is a bank account which any Non-Resident Indian (NRI) or Person of Indian Origin (PIO) can open in India. The biggest feature of this account is that the money in it is not deposited in Indian Rupees but in foreign currency (like US Dollar, Pound, Euro, Yen). Since the money remains in foreign currency, the risk of loss due to currency fluctuations is zero. After maturity, NRI gets the money back in the same foreign currency only. The entire interest received on FCNR account is completely tax-exempt in India and this money can be easily repatriated.
RBI had recently announced
Now non-resident Indians (NRIs) can consider keeping their dollar savings in India. The Reserve Bank of India (RBI) in its monetary policy review in June announced that it will bear the full cost of foreign currency hedging on new foreign currency non-resident (bank) deposits with a tenure of 3-5 years deposited till September 30, 2026. On June 17, the Central Bank also lifted the cap on interest rates offered by banks on these deposits.
The result is that big banks are now paying 6 percent interest on dollar deposits, while some small banks are paying up to 7.1 percent interest. Meanwhile, on June 18, Equitas SFB raised interest rates on US dollar-denominated FCNR (B) deposits for a tenure of 3-5 years to 7.13 per cent per annum. As against US treasury yields of 4-4.2 per cent, this is an arbitrage of 2-3 percentage points in the dollar, with no currency risk to the investor and no tax liability in India. This is more aggressive than the RBI’s 2013 move, which limited hedging costs to 3.5 per cent, but still raised $34 billion.
Who is paying how much interest on FCNR?
| bank | interest rates (in percentage) | ||
| 3-4 Year | 4-5 Year | 5 Year | |
| AU Small Finance Bank | 7.1 | 7 | 7 |
| Axis Bank | 6 | 6 | 6 |
| Equitas Small Finance Bank | 7.13 | 7.13 | 7.13 |
| HDFC bank | 6 | 6 | 6 |
| ICICI bank | 6 | 6 | 6 |
| Punjab National Bank | 6.4 | 6.45 | 6.5 |
| State Bank of India | 5.25 | 5.5 | 5.75 |
| Ujjivan Small Finance Bank | 7.13 | 7.13 | 7.13 |
How does this scheme work?
FCNR (B) is a fixed deposit which NRIs keep in India in foreign currency of their choice. It is available in five currencies: US Dollar (USD), British Pound (GBP), Singapore Dollar (SGD), Canadian Dollar (CAD) and Australian Dollar (AUD). Unlike Non-Resident External (NRE) fixed deposits, which convert your dollars or dirhams into rupees at the current rate, FCNR(B) keeps your money in the same base currency throughout the tenure. On maturity, you get your principal and interest back in the same currency. There is no risk of converting it into rupees.
This scheme is available for NRIs, Overseas Citizens of India (OCI) and Persons of Indian Origin (PIO). This facility is open till 30 September 2026 for new deposits with a tenure of 3-5 years. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements are also not applicable on these deposits, making it attractive for banks to raise them. There has been a lot of change in the rates. Earlier, FCNR rates were around 3.5-4%.
NRE FD or FCNR?
In India, both NRE fixed deposits and FCNR (B) deposits are tax-free and can be fully withdrawn. The real difference is currency. NRE FD is in rupees. In this you have to bear the risk of depreciation of the currency, and if we look at the earlier figures, it has not been beneficial. Since 1991, the value of the rupee against the dollar has declined by 4-4.5 percent every year. The NRI who had invested money in an NRE FD offering 7 per cent interest a year ago, actually gained only 2-2.5 per cent in dollar terms because the value of the currency had depreciated.
FCNR(B) eliminates this risk completely. Kalpesh Ashar, founder of ‘Full Circle Financial Planners and Advisors’, says in the ET report that for those who want to hedge their dollar holdings, FCNR is without any doubt a better option than rupee denominated FD, because the currency hedge is completely covered in it.
However, advisors do not recommend breaking the existing NRE FD. There are penalties for premature withdrawals, and switching would mean a loss in currency terms. According to Rakesh Patil, founder of wealth management and corporate treasury platform ‘Journie’, the better way is to make new investments elsewhere. They say that the money kept in US Certificate of Deposit, Treasury Bill or UAE Fixed Deposit should be invested elsewhere. This is where we get an opportunity for comparison and understand the importance of arbitrage.
advantage of location
Not all NRIs get the same benefits. The tax system of the country in which you live changes the calculations significantly. NRIs living in Gulf countries like UAE, Saudi Arabia, Qatar, Kuwait, Bahrain and Oman are in the best position.
Most Gulf countries do not impose personal income tax on interest, and investors based in the Gulf do not have to meet US-specific reporting requirements such as FBAR (Foreign Bank and Financial Account Report) and FATCA (Foreign Account Tax Compliance Act), BankBazaar CEO Adhil Shetty says in an ET report. According to Patil, a 6 per cent rate in dollars, which is tax-free everywhere, equates to a pre-tax return of about 9 per cent.
The situation is slightly different for NRIs living in the US. The Internal Revenue Service (IRS) treats the interest earned on foreign deposits as ordinary global income and taxes it, which reduces the net return. But the arbitrage on US Treasuries, which is still 2 percent or more, remains largely the same after tax, because the same tax rules apply to Treasuries.
NRIs living in the UK also have to face higher taxes like in the US, where interest is included in the taxable income. NRIs living in Singapore, like NRIs living in Gulf countries, are in a very good situation. In Singapore, there is no capital gains tax and no tax on income from debt instruments, allowing the entire 6-7% of the income to be retained.
What things to keep in mind
- Investors should keep some limitations in mind. There is a lock-in period of one year, and to withdraw money prematurely, the entire deposit amount has to be withdrawn, on which penalty is also imposed.
- Bank credit risk also matters: Small finance banks that are offering 7.1% interest are doing so because they have to keep their risk in mind. Big banks offering 6% interest have a different risk profile.
- OCI and PIO investors may face documentation issues, especially if they are new customers to an Indian bank. Video-KYC has made this process easier, but new customers in the bank should find time for it before the September deadline.
- NRIs who have returned to India and have RNOR (Resident but Not Ordinarily Resident) status cannot open new FCNR deposits.
Rethinking Real Estate
Kalpesh Ashar tells another important thing. Based on his two decades of experience advising NRI clients, he says that most of those who have invested in Indian real estate have not had a good experience. It proved to be a loss-making deal due to poor returns, lack of liquidity and exchange rate fluctuations. Instead of investing extra money in a property at home, a dollar deposit with 6-7 per cent interest could be a better option. This opportunity may quietly shift some investments away from real estate and towards financial assets.
a small chance
The deadline of 30 September 2026 is firm, and after that the risk of re-investment will also remain. Once this opportunity is over, it will be almost impossible for banks to maintain these rates without incurring the cost of hedging by the RBI. As Ashar says that RBI has given less time for such deposits. It would be wise to focus on new investments without disturbing the existing portfolio. For NRIs considering their options, advisors are unanimous that the record for dollar deposits in India has not been so good over the years. The currency hedge is fully covered, the pre-tax rates are better than most global options, and there are tax benefits in India too. Especially for investors based in the Gulf countries, this could be one of the neatest fixed-income opportunities available right now. If you invest after fully understanding the lock-in period, the bank chosen and the tax rules of your country, then there does not seem to be any concrete reason for not choosing this option.
