Wealthy Indians Exploit FCNR Scheme via NRI Relatives for High Returns

Wealthy Indians are finding ways to benefit from a new foreign currency deposit scheme. They are sending money to NRI relatives as gifts to invest in lucrative FCNR accounts. This strategy aims for high returns and potential tax benefits. NRIs are also moving funds to these new deposits. This practice echoes past schemes, offering attractive dollar returns.

Mumbai: An old plot around money, machinations, and the artful Indian mind is brewing.

Whenever New Delhi bore the cost to lure the diaspora with safe, tempting returns amid a dollar crunch, many local Indians found a way to grab a slice of the action: gatecrashing a party they are not invited to. It has been happening since 1998. It may be no different this time.

Today, many well-heeled residents are gearing up to use the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS) to transfer funds from here as ‘gifts’ to their NRI brothers, sisters and other legal ‘relatives’ they can trust, for indirectly parking funds in the new foreign currency-non-resident (FCNR) deposit scheme, said sources in the advisory and wealth management circles.

They are viewing the FCNR scheme as a riskless product, offering one of the highest fixed income dollar returns, that can also be tax-free if such relatives are located in UAE which has no personal income tax and no plans to impose one in the near future.

Simultaneously, many NRIs (non-resident Indians) are considering moving money from existing FCNR and other accounts like NRO (non-resident ordinary) and NRE (non-resident external rupee).

NRIs have three main bank accounts. They deposit foreign earnings in an Indian bank’s NRE account where savings are maintained in rupees; NRO is an Indian rupee-denominated account designed to manage NRIs’ earnings from India, such as rent, dividends, etc. FCNR is a fixed deposit account for NRIs to save overseas earnings in foreign currencies within India.

“Many NRIs have started breaking prematurely existing NRE as well as FCNR deposits, and thus foregoing the interest accrued till date. Deposits placed under the new FCNR scheme are more lucrative and equally safe. The leveraged deposits, often over nine times, will further raise returns. Residents planning gifts to NRI relatives who can be trusted to hold the money viewed it as exploiting a loophole in the regulations,” said senior CA and FEMA specialist Pankaj Bhuta.

“Many NRIs have started breaking prematurely existing NRE as well as FCNR deposits, and thus foregoing the interest accrued till date. Deposits placed under the new FCNR scheme are more lucrative and equally safe. The leveraged deposits, often over nine times, will further raise returns. Residents planning gifts to NRI relatives who can be trusted to hold the money viewed it as exploiting a loophole in the regulations,” said senior CA and FEMA specialist Pankaj Bhuta.

“Given the high returns, some are exploring this — as many had during past such schemes since 1998. However, both transactions — by NRIs as well as residents — are fully permissible transactions and technically do not violate regulations under the Foreign Exchange Management Act (FEMA),” said Bhuta.

An NRI is permitted to remit up to $1 million a year from NRO account — a regulation that comes handy in transferring funds from NRO to the new FCNR scheme.

“As I see, both transactions, by residents as well as NRIs, would play out. Residents, looking to diversify assets in safe dollar instruments, will be drawn by the high leverage possibility and the corresponding higher returns,” said Rajesh Shah, partner at CA firm Jayantilal Thakkar & Co, which specialises in FEMA advisory and international tax. “To NRIs, RBI has given an opportunity to make the most of their dollar asset — particularly, as earnings are not taxed in India. One is reminded of the Resurgent India Bonds of 1998,” he said.

Money coming in would exceed what flows out under LRS, thanks to leverage. Residents would either receive the money back after five years as a ‘gift’ — rather, a reverse gift — from NRI relatives, or keep the funds overseas, depending on family arrangements and understanding. Neither the ‘gift’ nor the ‘reverse gift’ between family members is taxed in the hands of the recipient. The scope for this was less in 2013: a month before a similar FCNR scheme was launched that year, RBI had dramatically lowered the LRS limit in August 2013 from $250,000 to $75,000 per financial year.

RIBs were another story: the instrument was said to have been misused by transferring undisclosed funds to relatives abroad and bringing the money back to India to earn tax-free interest.

Simply put, the FCNR scheme entails the exchequer eventually bearing the cost of extra return offered to NRIs — initially, RBI picks up the tab by absorbing the hedging cost on behalf of banks and later ends up paying a lower dividend to the government.

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