An FCNR account is a term deposit that an NRI opens at an Indian bank in a foreign currency — US dollars, pounds or another currency the bank offers — rather than in rupees. The bank pays interest in that same currency, and both the deposit and the interest come back to you in that currency when it matures or you close it.
The main reason people choose FCNR over an NRE account is currency risk. An NRE deposit is held in rupees, so its foreign-currency value moves with the exchange rate between the day you deposit it and the day you withdraw it. An FCNR deposit stays in the currency you put in, so there’s no conversion risk on the principal while it sits in the account — only the interest rate on offer varies by currency and bank.
How it’s taxed
FCNR interest is exempt from Indian income tax while you’re non-resident, and also while you’re RNOR after moving back, and both principal and interest are freely repatriable. Once you return, the deposit can run to maturity at its agreed rate; at maturity it’s converted to a resident foreign-currency account or a regular rupee account, and interest is taxed like any resident’s once you’re ordinarily resident.
Choosing between NRE and FCNR
There’s no single right answer — it depends on how confident you are about future exchange-rate movements, how long you want to lock the money away, and which currencies your bank offers FCNR deposits in. Both are exempt from Indian tax on interest while you’re non-resident; the difference is which currency carries the risk while your money sits in India.
Also called: Foreign Currency Non-Resident account, FCNR(B)