Drips of foreign currency-Foreign Accounts

Drips of foreign currency: Only potion for the ailing rupee

As rupee continues to plummet, now trailing at 64.42 per USD, recently the apex bank has made some changes in the interest rates of FCNR (B) account.  This step has been taken to bolster the tardy foreign export credit inflow. This is sufficed to say that India’s rupee strength overtly depends on the amount of foreign currency, mostly dollar. The more dollars trickle in, the stronger is the rupee. 

Here, this article is presenting you precise but succinct information about types of foreign accounts available in India.

Many NRIs are often faced with the situation of maintaining a Rupee account in India. To encourage Non Resident Indians (NRI’s) and Persons of Indian Origin (PIO’s) staying abroad to invest in India, the Govt. has allowed these Individuals to open 3 types of NRI Account in India:-

NRE

NRO

FCNR(B)

1.   NRE Account i.e. Non-Resident External Account is a rupee denominated account and the amount in this type of account is freely repatriable. This type of NRI Account can either be in the form of Savings, Current, Recurring or Fixed Deposit.

As this form of NRI Account is rupee denominated, the investor will have to convert Foreign Currency into Rupees and in case he intends to take the funds back to his home country, he will again have to convert the Rupees into Foreign Currency This form of NRI Bank Account is best suited for overseas savings which have been remitted to India by converting the foreign currency into INR.

Joint Holding: NRE account can be jointly held with another NRI but not with resident Indian. On the other hand NRO account (discussed below) can be held with NRI as well as resident Indian (close relative) as defined under Section 6 of the Companies Act 1956.

2.  NRO Account i.e. Non-Resident Ordinary Account is a rupee denominated account and can be in the form of savings or current or recurring or fixed deposit. The income which is deemed to accrue or arise in India can be deposited only this type of account. Examples of such forms of incomes are Rent, Dividend and Commission etc. the interest earned in NRO account and credit balances are subject to respective income tax bracket and are also subject to applicable wealth tax (Govt. has done away with this tax and subsumed it in indirect tax system in the form service tax.)

Such incomes cannot be deposited in NRE Account. Moreover, the interest earned on this form of account is also taxable as compared to NRE and FCNR Account in which Tax on Interest is not levied in India. TDS on the amount accrued in the form of Interest is applicable in NRO account.

Choose N RE accounts if you:

(Primary reason) want to park your overseas earnings remitted to India converted to Indian

Rupees;

·         want to maintain savings in Rupee but keep them liquid;

·         want to make a joint account with another NRI;

·         want Rupee savings to be freely repatriable

Choose NRO account if you:

(Primary reason) want to park India based earnings in Rupees in India;

·      want account to deposit income earned in India such as rent, dividends etc;

·      want to open account with resident Indian (close relative)

3.  FCNR (B) stands for Foreign Currency Non Resident Account (Banks) and can only be opened in Foreign Currency and not in the Indian Currency. It is a form of fixed deposit on which regular interest is paid. As Interest Rates in India (approx 7-8%) are much higher as compared to the interest rates in western countries (approx 1-2%), many NRI’s invest their surplus funds in fixed deposits in India through this type of NRI Account Another benefit of this type of NRI Bank Account is that the investor will not have to bear any risk of fluctuations in the foreign currency. Say for e.g.: Mr. A invests $10 in this form of NRI Account and the Interest Rate is 10% p.a., he would get $ 11 at the end of the year irrespective of the Rupee-Dollar exchange rates. And therefore in this form of NRI Bank Account, he is free from any foreign exchange risk.

This type of NRI Bank Account can be opened for a minimum of 1 year and a maximum of 5 years. Moreover, the interest earned on this form of NRI Bank Account is also exempted from tax in India.

NB. The Foreign Currency Non-Resident (FCNR(B)) scheme was introduced with effect from May 15, 1993 to replace the then prevailing FCNR(A) scheme introduced in 1975, where the foreign exchange risk was borne by RBI and subsequently by the Govt. of India. The FCNR (A) scheme was withdrawn in August, 1994 in view of its implications for the central bank’s balance sheet and quasi-fiscal costs to the Government.