FCNR scheme: Withholding tax fear haunts US, Singapore NRIs

A 10% withholding tax (WHT) can be levied on the interest on loans that NRIs in these countries pay to the lending banks outside the respective jurisdictions.

Thus, if a bank (outside the US or Singapore) is charging, for instance, an interest of 6% on the leverage offered in the scheme, the actual cost to an NRI would be 6.6%.

“If a Singapore resident individual obtains leverage from the Singapore branch of an Indian bank, to invest in FCNR deposits, the interest paid to that branch is not subject to Singapore withholding tax. However, if the borrowing is from the GIFT City branch of the same Indian bank, the interest paid is subject to Singapore withholding tax. The domestic withholding tax rate is 15%, although this can generally be reduced to 10% if the conditions under the India-Singapore DTAA are satisfied,” said Eunice Hooi, director, head of tax & transfer pricing at InCorp Global, a Singapore-based corporate services and business advisory firm.

Agencies

In the leveraged deposit arrangement, an NRI chips in an initial deposit, say $1 mn, and borrows $9-19 mn, depending on the leverage a bank offers, to push up the final return. Since the difference between the basic FCNR return and the lending rate is 50 to 80 points, a WHT on the loan interest can significantly diminish the effective return from total deposit.