What NRIs looking to invest in India should know

FCNR is the answer!

My doctor niece Neeta, married to a US resident, wanted to invest some of her earnings in India, which she discussed with me on her recent trip to India.  Though she has retained her Indian Passport for the purpose of foreign exchange, she is treated as NRI.
India being constantly viewed as an emerging economy, the interest of many Indians like my niece has gone up considerably in India story for the purpose of investment.  From direct investments in Equity to real estate to deposit with banks, India offers a bouquet of investments for NRIs. For the people who are risk averse and do not want to take either the risk of investing in equity or risk of fluctuation in exchange rate between two currencies, banks offer a novel product to such people. This is called Foreign Currency Non-Resident (FCNR) account.
Let us now understand various features and benefits of opening an FCNR account. Who is a NRI?
Before we proceed further on the investment avenue, let us understand who is a NRI for the purpose of investment in India. A Non-Resident for the purpose of opening the bank account is different from the one who is recognized in the Income Tax Act. Under the provisions of Income Tax Act, a person becomes a non-resident on the basis of his stay in India during the previous periods. Whereas under Foreign Exchange Management Act, a person is treated as NRI if he/she is staying outside India, may not plan to return to India in the immediate future. He may be there for the purpose of business or employment.  It may be noted that all NRIs continue to be Indian Citizen. The second category of persons, who are relevant for our understanding are non Indian Citizen but either they themselves held Indian passport or their fathers or grandparents were Indian Citizens. It may be noted that the spouse of the person who is PIO (Person of Indian Origin) is also treated as one. What is FCNR account?
FCNR account is a fixed deposit maintained with a bank in India. The currency value of such account is mentioned in foreign currency of your choice and not in Indian rupees, which is the case generally when we open any banking account with a bank in India. The facility to open an FCNR account is available in any of the freely convertible currencies.  This includes US Dollars, Sterling Pound, Canadian, Australian and Singaporean dollars. Japanese yen. The deposits can be made for any period ranging from one year to five years. Even premature withdrawals of the deposits are also allowed subject to penalty for rate of interest payable. However in case you prematurely withdraw the money from these deposits before completion of one year, you will not earn any interest on the deposit. Who can open an FCNR account?
Any person who is an NRI (Non Resident Indian) or a PIO (person of Indian origin), as explained above, can open this account. Since the account is denominated in foreign currency, the money should come from foreign sources so money from Indian source cannot be used for the purpose of opening the FCNR account. The money can either be remitted from abroad through electronic transfer or through cheque or draft. Money lying in your NRE account can also be used to open the FCNR. How to open the bank account?
Please note that one does not have to physically be present in India to open the FCNR account. This can be done from the city of your residence. What is required is that you are required to submit some basic documents to authenticate your Identity (Passport), employment status (Visa), proof of your foreign address along with the account opening form. Most of the banks have put the details of the documents required to be submitted, for this purpose, on their website. These documents need to be certified by specified people. The persons who can certify these documents include the officials of foreign branch of the bank, official of consulates or notary public etc. One has to send the initial deposit with the documents for opening the deposit. Tax treatment of interest earned FCNR account
As per the existing provisions of Section 10((4)(ii) any interest earned by the person on bank accounts opened under FCNR is exempt from payment of Income Tax in India. The accounts opened under FCNR are also termed as Non Resident External Account. It is pertinent to note that though the interest earned on such deposits is exempt in India, the NRI may have to pay tax in the country of his residence depending on the tax law of country of his residence. Since the interest on such account is tax exempt, the question of tax deduction at source in India does not arise. This helps you in maintaining your cash flow without any money being blocked in tax. Higher rate of interest with insulation from exchange rate fluctuations
The rate of interest offered on the deposits under FCNR is generally lower than those offered to resident on their accounts denominated in Indian Rupees. However the rate offered on these accounts is far higher than the rates, which the NRI can get in the country of their residence. Moreover since the money is denominated in the foreign currency, you will get the same amount in foreign currency at the time of maturity. This will safeguard your from any adverse fluctuations in the exchange rate between the Indian Rupee and the foreign currency. The rate of interest offered on FCNR account is not uniform across all the currencies and vary from currency to currency. This is because of the relative strength of the concerned currency and prospect of fluctuation in the same. The rate of interest also varies on the basis of duration of the deposit. Other facilities:
You can appoint a nominee for the accounts opened under FCNR. Moreover the amount of investment and interest earned on FCNR deposit can be fully sent back out of India without any special approval from RBI. The FCNR account can be maintained in joint names. The other holder either has to be Non Resident Indian or an Indian resident who is a close relative. Even the Indian relative is allowed to transact on this account provided a power of attorney is filed with the bank concerned. One more facility available on FCNR account is that you can take a loan against the FCNR to the extent to 80-85% of value of the FCNR deposit. Resident Indian can even also avail loan on this FCNR account provided   the borrower obtains consent of the deposit holder and submit to the lender.
I hope I have addressed all the issues of those NRIs who are willing to invest in India like my niece Dr. Neeta. Like you, I am sending this article to her so that she is well equipped to open the FCNR account.  
ApnaPaisa is India's leading Online market place for financial products such as loans, credit cards and insurance plans. Author can be reached at www.facebook.com/apnapaisa.