Pros and Cons of FCNR Account: Why and Why Not?

With multiple investment options available for an NRI to hold some money in India, one might find it tedious to figure out the details, benefits, and disadvantages of those options. Read more to find out why the Foreign Currency deposit might be a good option if certain points are kept in mind.

FCNR, which stands for Foreign Currency Non-Resident Account, is a good choice for NRIs who wish to invest money but want to minimize risks. Several reasons make FCNR an attractive investment destination for NRIs. However, it is important to make an informed decision by evaluating both pros and cons of this NRI investment vehicle.

Here are some reasons why it could be an option for you to consider.

Pros

1. Protected against forex rate: One of the best reasons why you should consider opening an account is the fact that it is not affected by the exchange rate. This is possible because the money is maintained in foreign currency. In the current scenario, with the rupee being volatile, it is anattractive feature favouring the NRIs.
2. Exempt from income tax: The interest earned from the FCNR rateis exempt from income tax. However, it must be kept in mind that it is exempt from tax as long as the holder of the deposit is an NRI. If the person qualifies as an ordinary citizen (i.e. residing in the country), he/she will have to pay income tax on the interest.
3. Freely Repatriable: Repatriable is the term used to describe the ease with which one can move their liquid assets from one country to another. In this case, it is important to know that the deposit made is freely repatriable, and you can transfer them to another account or bank at your place of residence.
4. Local Payments: Another advantage lies in the fact that the deposit is not only repatriable but can also be used to make local payments. Upon maturity, you can transfer the assets to an NRE account, and the money can be used to make local payments too. Additionally, you are also entitled to draw a loan against the FCNR if you wish to.

While FCNR is popular amongst the NRIs for the above reasons, it’s important to keep these nuances in mind while opting for FCNR deposits. 

Cons

1. Bank selection: Even though it is an investment option with low risk, you need to keep in mind that bank selection could be tricky. A bank may offer high FCNR rate, but if the bank moves towards bankruptcy or grows weak, it may not be able to pay back the amount on maturity. Credit guarantee can only cover up to 1,00,000 INR. Thus, it is essential to select a reputable bank.
2. Financial Meltdowns: A case where your funds might be locked or tied down to the country is during a financial meltdown. During this time frame, you will not be able to repatriate the assets to another country.
3. Penalties: If you wish to withdraw the money before maturity, it can be done. The downside is that swapping charges for the account is fixed by the bank and you will have to pay the penalty for withdrawing the money before the tenure.

Safe Option, If Chosen Wisely

FCNR account is invariably a safe investment option provided you make a smart and proper choice regarding the selection of bank, tenure for the deposit, etc. Rather than being attracted by high interest rates solely, take some time to analyze and evaluate the bank’s performance in the past few years, and park your funds in an FCNR deposit without much ado.