FCNR(B) deposits after August 31: Should NRIs lock in high rates or keep dollars abroad?

With the Reserve Bank of India’s special concessional swap window for Foreign Currency Non-Resident (Bank), or FCNR(B), deposits set to close on August 31, NRIs face an important choice: lock in relatively attractive returns in India or continue holding their dollars in overseas accounts and investments.

The decision, however, goes beyond the headline interest rate. Taxation, liquidity, investment horizon, currency exposure and deposit protection can materially change the attractiveness of an FCNR deposit.

Why August 31 matters for FCNR deposits

CA Sneha Kejriwal, CFA L3 and Finance Content Creator, said the special RBI swap window was the key factor that made FCNR deposits particularly attractive in recent months.

“FCNR isn’t the best option anymore because the one thing that made it special—the June swap window by RBI—is closing soon on 31st August,” she said.

Under the special facility, banks offered significantly higher FCNR rates, with some rates going up to around 6-7% depending on the currency and tenure. Kejriwal said the structure could generate substantially higher returns for investors using leverage, although such returns should not be confused with the ordinary interest earned on an FCNR deposit.

Once the special window closes, regular FCNR deposits could offer rates closer to 4-4.5%, making the comparison with dollar savings products abroad more relevant.

MUST READ: FCNR(B) deposits surge $65.4 billion, pushing India’s forex reserves to a record $729.33 billion

FCNR or dollars abroad?

Ankur Choudhary, CEO and Co-Founder of Belong, said NRIs should not make the decision based solely on interest rates.

“FCNR(B) deposits can suit NRIs who want to hold foreign currency, earn a fixed return and retain repatriability without direct INR currency exposure,” he said.

However, keeping dollars abroad may be more suitable for NRIs who need greater liquidity or want to invest in global opportunities. Special FCNR rates may also require investors to lock in funds for three to five years.

For an NRI expecting major expenses during that period, keeping some dollars overseas can provide greater financial flexibility.

Tax and currency factors

FCNR interest is generally exempt from Indian income tax for eligible NRIs, but the tax treatment in the country where the NRI is resident can be different. Therefore, investors need to assess the post-tax return rather than simply comparing advertised rates.

For UAE-based NRIs, Choudhary sees a stronger case for maintaining dollar-denominated investments because the UAE dirham is pegged to the US dollar. He also pointed to the long-term depreciation of the Indian rupee against the dollar.

For NRIs returning to India, the Resident but Not Ordinarily Resident (RNOR) regime may also affect the taxation of foreign-sourced income during the applicable transition period.

MUST READ: FCNR(B) deposits: IDFC FIRST, IndusInd offer 6.75%; top PSU banks offer 6.60% as RBI forex window nears closure

What should NRIs do?

The choice ultimately depends on the purpose of the money. FCNR deposits can make sense for NRIs seeking predictable dollar-denominated returns and willing to lock in funds, while overseas dollar holdings may be preferable for liquidity and global investment opportunities.

With the special swap window ending on August 31, NRIs should compare the post-window FCNR rate, overseas dollar returns, tax liability and liquidity needs before deciding where to park their money.

MUST READ: Why RBI closed FCNR(B) window early despite ruling it out two weeks earlier