Concerns over overseas withholding tax rules could influence participation in India’s foreign currency deposit mobilisation drive
Non-Resident Indians (NRIs) in the United States and Singapore are seeking greater clarity on the tax implications of India’s Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme, amid concerns that overseas withholding taxes could reduce the effective returns on their investments.
The renewed interest comes as Indian banks actively market FCNR(B) deposits following the Reserve Bank of India’s special measures to attract foreign currency inflows. The scheme offers higher interest rates and tax-free interest income in India, making it an attractive investment option for overseas Indians.
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However, tax experts have cautioned that while FCNR(B) interest remains exempt from Indian income tax, investors must also consider the tax laws of their country of residence
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In the United States, worldwide income is generally taxable, requiring residents to report foreign interest earnings
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In Singapore, certain financing structures, including loans linked to Indian bank branches in GIFT City, may attract withholding tax, potentially reducing overall returns
Bankers said the uncertainty is particularly relevant for leveraged FCNR(B) investment structures, where investors borrow funds overseas to maximise returns from higher-yielding deposits in India. Industry participants believe clearer guidance on cross-border taxation would improve investor confidence and encourage greater participation from NRIs in these jurisdictions.
The concerns emerge at a time when the RBI’s temporary FCNR(B) mobilisation window has already attracted strong overseas interest. Recent data show that banks have mobilised billions of dollars in fresh FCNR(B) deposits under the special scheme, supporting India’s foreign exchange reserves and easing liquidity pressures within the banking system. Analysts expect inflows to rise further before the window closes later this year, although tax-related uncertainties could influence participation from some overseas investors.
