19x leverage on FCNR(B) deposits and high returns may not work for NRIs based in Singapore in this case

A lot of Non-resident Indians (NRIs) are really interested in investing in FCNR (B) deposits ever since the government decided to cover the hedging costs for 3–5-year deposits. Banks have ramped up the interest rates on 3-5 year Foreign Currency Non-Resident (Bank)- FCNR (B)- deposits quite a bit. On top of that, banks like HSBC Bank are offering leverage as high as 19x.

But here’s a catch. Many NRIs, who are tax residents of Singapore, may not get the leverage advantage on FCNR (B) The Inland Revenue Authority Singapore (IRAS) has said that if an individual tax resident in Singapore pays interest to a bank in India, that interest is deemed to be derived from Singapore and Singapore withholding tax would apply on it.


According to a report in the Economic Times, IRAS said: "Under Section 12(6) of the Singapore Income Tax Act 1947 ("ITA"), any interest in connection with any loan or indebtedness borne, directly or indirectly, by a person resident in Singapore is deemed to be derived from Singapore. In this regard, where an individual tax resident in Singapore pays interest to a bank in India, such interest is deemed to be derived from Singapore and Singapore withholding tax would apply.”

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The IRAS, however, said that if the payment is made to a Singapore branch of an Indian bank, the withholding tax will be waived. It must be noted that withholding tax is not the final tax payment as it can be adjusted against gross tax liability. Consider this as Singapore’s equivalent of India’s TDS.

Explaining the situation, Tanvi Kanchan, associate director, Anand Rathi Shares & Stock Brokers, told ET Wealth Online that under Singapore’s stand on withholding tax, a plain, unleveraged FCNR(B) deposit, the deposit interest stays tax-free in India, remains untouched, and there's no Singapore withholding tax because there's no loan.

“The withholding tax question only arises when the borrowing is routed through a non-Singapore branch (GIFT City branches are the flashpoint) rather than the Singapore branch of the same Indian bank,” says Kanchan.

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How Singapore’s withholding tax can impact NRIs’ FCNR (B) earnings

Kanchan says Singapore’s withholding tax can wipe out almost the entire leverage advantage on FCNR (B) deposits, and an investor may end up earning what they'd have earned by just parking their money directly in FCNR(B), minus the leverage risk.

To prove her point, Kanchan has a calculation showing how the Singapore revenue authorities' stand can cost almost the entire leverage advantage to NRIs if they invest $1 million in an FCNR (B) deposit and take a 9x ($9 million) leverage.

Explaining her calculation, Kanchan says a 10% Double Taxation Avoidance Agreement (DTAA)-rate withholding tax eats roughly 36% of the spread income, and at the full 15% domestic rate, it wipes out almost the entire leverage advantage.

	Without withholding (WTH) tax	With WHT (10%, DTAA)	With WHT (15%, no treaty relief)
Deposit interest *	$420,000	$420,000	$420,000
($1mn @ 4.20%)
Loan interest	$328,500	$328,500	$328,500
($9mn @ 3.65%)
WHT on loan interest	–	$32,850	$49,275
Effective interest cost	$328,500	$361,350	$377,775
Net spread income	$91,500	$58,650	$42,225
Effective yield on $1mn own capital	9.15%	5.87%	4.22%

*(These are indicative rates for illustration — actual FCNR(B) card rates and loan pricing vary by bank and currency)

Assumptions: Own capital $1 million, 9x leverage ($9mn borrowed), FCNR(B) deposit rate 4.20% p.a., loan rate 3.65% p.a. (a ~55 bps spread, in line with the 50–80 bps banks typically offer).

When NRIs in Singapore don’t have to pay withholding tax

Kanchan saysfor Indians in Singapore,if they are an ordinary NRI depositor (no borrowing involved), nothing changes.

“Their FCNR(B) interest stays exempt from Indian tax, and there's no Singapore withholding because you're not paying interest to anyone.”

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Withholding tax depends on lending bank branch

Kanchan explains that if you're using or being pitched a leveraged FCNR(B) structure, the tax bite depends entirely on which branch of the bank is lending you the money.

“Loan from the bank's Singapore branch: no Singapore withholding tax. Loan from a GIFT City (or other offshore) branch of the same bank: Singapore withholding tax applies, at 15% domestically, reducible to 10% under the India-Singapore DTAA with proper documentation,” says Kanchan.

What investors should consider before investing in FCNR (B)

Adhil Shetty, CEO, Bankbazaar, says FCNR(B) deposits are well suited for NRIs who already hold savings in an eligible foreign currency.

However, Shetty advises such investors to evaluate factors beyond the interest rate.

“Investors should consider whether the deposit fits their currency needs, as converting funds solely for investing may involve conversion costs and exchange rate movements. While the interest is tax-free in India for eligible NRIs, it may be taxable in the country where they reside, which can affect post-tax returns,” says Shetty.