FCNR(B) FD vs NRE FD: Where can NRIs earn more on $50,000 investment? Compare returns, currency risk and tax benefits

Non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) have the option of investing in Foreign Currency Non-Resident- FCNR(B)- and Non-Resident External Account (NRE) products such as fixed deposits (FDs) to generate a stable income from India. Both FCNR(B) and NRE FDs come with varied interest rates for different tenures, are tax-exempt and can be fully repatriated without any limits set by the Reserve Bank of India (RBI). However, they do have key differences.

In an FCNR (B) FD, an NRI can invest in foreign currencies like the US dollar or British Pound; while NRE FDs are denominated in Indian rupees. The compounding frequency for an FCNR(B) FD is every six months, whereas NRE FDs compound quarterly.

Investment in an FCNR(B) FD provides protection against currency depreciation, while an NRE FD doesn’t provide any such protection.


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So which fixed deposit yields a better return for a similar investment- FCNR(B) or NRE? Based on expert calculations, ET Wealth Online shows what return an NRI can expect on a $50,000 FD investment in FCNR(B) and Rs 47 lakh (equal to $50,000 at $1=Rs 94) investment in an NRE FD at a 7% interest rate in each. The calculations show interest earned, US$ and INR value, currency risk and post-tax returns.

FCNR(B) vs NRE fixed deposit: Where does $50,000 investment can help NRIs earn more?

FCNR(B) vs NRE FD: Return comparison at 7% interest rate

Tanvi Kanchan, associate director, Anand Rathi Shares & Stock Brokers, presents a calculation where both products offer the interest rate of 7% p.a. The table below shows returns over five years before factoring in currency movement.

Tax Dimension	FCNR(B) Deposit	NRE Fixed Deposit
Interest — India	Fully exempt for NRIs. No TDS deducted.	Fully exempt for NRIs. No TDS deducted.
Interest — UAE / GCC	Nil. No personal income tax in UAE, Saudi Arabia or Qatar.	Nil. No personal income tax in UAE, Saudi Arabia or Qatar.
Interest — US / UK Residents	Taxable under local laws. Indian exemption does not apply.	Taxable under local laws. Indian exemption does not apply.
Repatriation	Fully repatriable — principal and interest, with no RBI ceiling.	Fully repatriable — principal and interest, with no RBI ceiling.

Factoring in currency risk

The FCNR(B) deposit carries zero currency risk from the investor's perspective. The client places $50,000, the bank holds those dollars, and at maturity the client receives $70,530 regardless of where the rupee has moved.

The NRE FD, by contrast, converts the dollar into rupees on Day One and reconverts at maturity, and the end dollar value is entirely a function of the USD/INR rate five years hence.

Also Read: FCNR deposit in demand: $1,277 extra interest on $10,000 investment by NRIs after RBI's latest move?

Over the past decade, the rupee has depreciated at a compounded rate of approximately 3% per year against the dollar.

However, if the value of the USD against INR stays the same or if it decreases, an NRE investor can get higher returns compared to an FCNR(B) investor on the same investment. But if the value of the USD depreciates, the FCNR(B) depositor can have an edge.

Scenario	INR/USD at Maturity	NRE Fixed Deposit – USD Value	FCNR(B) Deposit – USD Value
Rupee depreciates	₹ 98.00	USD 67,852	USD 70,530
Rupee stays flat (no movement)	₹ 94.00	USD 70,739	USD 70,530
Rupee appreciates	₹ 90.00	USD 73,883	USD 70,530

Factoring in taxation

Returns from FCNR(B) and NRE are exempt in India, but NRI investors may need to pay tax on such an income in the country of their
residence. The final return can depend on how that amount will be taxed in that particular country.

Parameter	FCNR(B) Deposit	NRE Fixed Deposit
Deposit Currency	USD (stays in USD throughout)	INR (converted at ₹94/USD)
Principal Invested	USD 50,000	₹ 47,00,000
Interest Rate	7.00% p.a. (USD Rate)	7.00% p.a. (INR Rate)
Compounding	Half-yearly	Quarterly
Tenure	5 years	5 years
Maturity Value	USD 70,530	₹ 66,49,457
Interest Earned	USD 20,530	₹ 19,49,457
USD Value at Maturity	USD 70,530 (fixed)	Depends on USD/INR exchange rate at maturity

FCNR (B) vs NRE: Which is better for NRIs and OCIs?s

Ankit Bagadia, director, business, BankBazaar, told ET Wealth that it may depend on how NRIs want to use returns, volatility
and currency movements.

Bagadia explains who should invest in FCNR(B) and NRE schemes.

When can an FCNR(B) fixed deposit be a better option for NRIs?

FCNR(B) deposits are generally better suited for NRIs who want to retain exposure to a foreign currency and avoid currency conversion risk. Since both the principal and interest remain denominated in the chosen foreign currency throughout the tenure, the depositor is protected from rupee depreciation.

Also Read: NRE vs NRO income tax rules: How these NRIs, OCIs can save up to Rs 20,500 on $10,000 FD investment

FCNR(B) deposits can be particularly relevant for NRIs who expect to use the funds overseas in the future or prefer certainty around the value of their investment in foreign currency terms.

They are also attractive during periods of heightened currency volatility when preserving foreign currency value becomes
an important consideration.

When is an NRE fixed deposit a better option?

An NRE fixed deposit may be more suitable for NRIs who have a positive outlook on the Indian economy and the rupee over
the long term, or who expect to use the funds in India eventually. NRE FDs are denominated in rupees and typically offer higher nominal interest rates than FCNR(B) deposits.

However, the eventual return for an NRI also depends on currency movements. If the rupee remains stable or appreciates
against the depositor's home currency, NRE FDs can potentially generate higher overall returns. They may also be preferred by NRIs who have regular financial commitments in India and are comfortable taking on some currency exposure.

Which can be a suitable option for NRIs planning to return to India?

For NRIs planning to return to India in the near to medium term, NRE fixed deposits may often be more relevant because
future spending and financial obligations are likely to be in rupees. However, the choice should also depend on the investor's expected investment horizon and currency requirements after relocation.

Which works better for short-term and long-term investment- FCNR(B) or NRE deposits?

For short-term parking of funds, FCNR(B) deposits may appeal to NRIs seeking currency stability and capital preservation
in foreign currency terms.

For longer investment horizons, the choice becomes more nuanced and depends on an individual's view on currency movements,
expected future spending needs, and return objectives.

Investors seeking rupee exposure may find NRE FDs more attractive, while those prioritising foreign currency preservation
may continue to prefer FCNR(B) deposits.