Revised UK tax rules may curb inflows into India’s foreign currency deposit schemes despite recent RBI incentives
PRAVASISAMWAD.COM
Recent changes to the United Kingdom’s tax regime are expected to reduce the attractiveness of Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits for wealthy Non-Resident Indians (NRIs), potentially affecting one of India’s key channels for attracting overseas foreign currency.
The change follows the UK’s move to tax the worldwide income of residents under its revised tax framework, replacing the long-standing non-domicile regime. As a result, interest earned on FCNR deposits in India, although exempt from tax in India, is now subject to UK taxation for many UK-based residents. In addition, certain borrowing costs linked to these investments may no longer qualify for tax deductions, reducing their overall financial advantage.
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The development comes at a time when the Reserve Bank of India (RBI) has introduced measures to encourage greater foreign currency inflows
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Earlier this year, the central bank announced it would bear the full hedging cost on fresh FCNR(B) deposits with tenures of three to five years until 30 September 2026 and removed the ceiling on interest rates, allowing banks to offer more competitive returns
However, tax experts believe the revised UK rules substantially weaken the post-tax returns available to affluent NRIs based in Britain. While FCNR deposits continue to provide protection against currency fluctuations and remain tax-free in India, investors must now consider their tax obligations in their country of residence before making investment decisions.
Industry observers say the new tax treatment could reduce fresh FCNR inflows from the UK, one of the important markets for Indian banks seeking overseas deposits. Some banks have already reported a moderation in FCNR deposit mobilisation as investors reassess tax implications and expected returns under the new framework.
Financial advisers recommend that UK-based NRIs review their investment portfolios in light of the regulatory changes and seek professional tax advice before investing in FCNR deposits or other cross-border financial products.
