Table of Contents
A time-bound opportunity for NRIs to lock in materially higher, tax-free returns on US Dollar deposits, with an added option to unlock borrowing power against the deposit. Window closes 30 September 2026.
Biz2India.in’s NRI Desk specialises in taxation, FEMA and regulatory advisory for over 200 NRI families and businesses across the globe. This note has been prepared for our NRI clients to help them evaluate this window in a timely and informed manner.
1. Background
To ease pressure on the rupee and attract foreign-currency inflows, the RBI (circular dated 8 June 2026) reopened a special swap window for FCNR(B) deposits — a facility last used in 2013.
Under the scheme, RBI itself absorbs the currency-hedging cost that banks would otherwise bear on dollar deposits, by agreeing to swap the dollars at a fixed (at-par) rate at both ends of the deposit term.
With hedging costs (previously ~2–3.5% p.a.) removed, banks have passed on materially higher interest rates to NRI depositors — quoted in the market between roughly 6% and 7.1% p.a. on 3–5 year USD FCNR(B) deposits, compared to ~3.5–4% earlier.
On 23 June 2026, RBI further clarified via FAQs that banks may lend to, or issue standby letters of credit on behalf of, non-resident depositors against these deposits — opening a leverage/borrowing avenue for clients.
2. Key Features of the Scheme
| Feature | Details |
|---|---|
| Enabling circular | RBI circular dated 8 June 2026 (announced 5 June 2026), operationalised further via RBI FAQs dated 23 June 2026 |
| Eligible deposits | Fresh FCNR(B) deposits (and eligible renewals) mobilised between 8 June 2026 and 30 September 2026 |
| Eligible tenor | Minimum 3 years, maximum 5 years |
| Currency covered by RBI swap | US Dollar (USD) only. Banks may still offer FCNR(B) deposits in other convertible currencies (GBP, EUR, AUD, SGD, etc.) outside the RBI swap |
| How the hedge works | Bank sells USD to RBI on day one and buys back the same amount at maturity at the identical (FBIL) reference rate — an “at-par” swap. RBI, not the bank, absorbs the rupee-dollar movement over the deposit term |
| Lock-in / premature withdrawal | Mandatory 1-year lock-in; premature withdrawal thereafter is at the bank’s discretion as per its internal policy |
| Indicative rates seen post-scheme | Roughly 6.00%–7.10% p.a. on 3–5 year USD deposits across banks, versus ~3.5%–4.0% p.a. before the scheme (bank-specific; verify current card rate before booking) |
| Regulatory relief to banks | Deposits under the scheme are exempt from CRR/SLR, further supporting the rate banks can pass on |
| Window for banks to access RBI swap | Available up to 16 October 2026 for deposits mobilised in the window above |
3. How Clients Can Benefit
- Lock in materially higher USD deposit rates than have been available in recent years, with principal and interest received back in USD (no rupee conversion risk on the deposit itself).
- Currency risk on the deposit is contractually with the bank/RBI arrangement, not the depositor — the depositor is paid in the currency deposited, regardless of rupee movement.
- Borrowing power: banks are now permitted to extend loans/overdrafts, or issue an SBLC in favour of an overseas lender, against FCNR(B) deposits mobilised under the scheme, with a lien marked on the deposit. Indicative terms across banks: 70–90% of deposit value, at the deposit rate plus ~1–1.5%, while the deposit continues to earn its full contracted interest.
- This can provide low-cost financing (in rupees or foreign currency) for property purchase, business/working-capital needs, or investment, without breaking the deposit — though RBI’s swap cover applies only to the deposit principal, not to the loan or its end-use.
- Brokerage estimates (e.g., Motilal Oswal) have suggested leveraged structures could deliver annualised returns in the 15–27% range; such figures assume a specific reinvestment outcome and carry market, credit and reinvestment risk — they are not assured and should not be treated as a guaranteed return.
4. Illustrative Case Study
Mr. A, a US-based NRI, places USD 500,000 in a 3-year FCNR(B) deposit at an indicative 6.75% p.a. within the window. The table below contrasts a plain deposit against a leveraged structure using an overdraft against the deposit.
| Particulars | Plain FCNR(B) (No Leverage) | FCNR(B) + Loan/OD (Leveraged) |
|---|---|---|
| Deposit placed (3-year FCNR(B), USD) | USD 500,000 | USD 500,000 |
| Indicative deposit rate (p.a.) | 6.75% | 6.75% |
| Loan / overdraft availed against deposit (illustrative 90% margin) | Nil | USD 450,000 |
| Indicative loan/OD rate (deposit rate + 1.5%, bank-specific) | N/A | 8.25% |
| Gross annual interest on FCNR(B) deposit | USD 33,750 | USD 33,750 |
| Annual interest cost on loan/OD | N/A | USD 37,125 |
| Illustrative return if loan proceeds are redeployed (e.g., business/trade funding, property) at an assumed 11% p.a.* | N/A | USD 49,500 |
| Net annual benefit before tax (redeployment return less loan cost) | N/A | USD 12,375 |
| Approximate all-in annual yield on the original USD 500,000 | 6.75% | ~9.2%* |
*Illustrative only. Assumes borrowed funds are redeployed at an 11% p.a. return — an assumption, not a guarantee. Actual loan margin, pricing and permitted end-use vary by bank and must be confirmed before booking; borrowing to invest amplifies both the upside and the downside, including the risk that the reinvestment underperforms the cost of the loan.
5. Tax Position in India
- Interest on FCNR(B) deposits is fully exempt from Indian income tax under section 10(4)(ii) of the Income-tax Act, 1961, for as long as the depositor holds NRI / “person resident outside India” status under FEMA — no TDS is deducted by the bank.
- The exemption is tied to residential status, not to the deposit itself: on the depositor’s return to India as a resident, the exemption ceases from that point and the deposit is generally redesignated as a resident/RFC account on maturity.
- Income earned by deploying loan proceeds within India (rent, business income, capital gains, etc.) is taxable under the normal provisions applicable to non-residents, with TDS under section 195 and DTAA relief where applicable — the FCNR(B) exemption does not extend to such onward income.
6. Tax Exposure in the Country of Residence
Most countries tax their tax residents (and, for the US, its citizens/Green Card holders) on worldwide income. Since India levies no tax on FCNR(B) interest, there is nothing to offer as a foreign tax credit under the relevant DTAA — the interest can therefore fall to be taxed in full in the country of residence, at applicable local rates. Indicatively:
- US: Taxable on accrual (Schedule B), typically with FBAR (FinCEN 114) and FATCA Form 8938 reporting for the underlying account.
- UK: Generally taxable on the arising basis for UK tax residents, subject to the post-April 2025 foreign income and gains rules for recent arrivals — treatment should be checked with a UK adviser given recent changes.
- Canada, Australia and most other OECD jurisdictions: Generally taxable as worldwide income for tax residents.
- GCC countries (UAE, Saudi Arabia, Qatar, etc.): No personal income tax at present, so no home-country tax leakage — CRS reporting by the Indian bank to the country of tax residence will still apply.
We recommend each client confirm treatment with a tax adviser in their country of residence before booking, since domestic rules and reporting thresholds vary and are subject to change.
7. Action Points
- Confirm current card rate, margin/leverage terms and loan end-use restrictions with the chosen AD bank before booking — rates and terms are bank-specific and can change.
- Complete documentation (source of funds, FEMA declarations) early given the compressed window and likely demand.
- Where leverage is contemplated, size it to the client’s risk appetite and confirm the reinvestment plan is itself compliant and realistic.
- Re-confirm residential status and reporting obligations in the country of residence before and after booking.
This note is for general information and client discussion purposes only, based on publicly available RBI circulars/FAQs and market reports as of early July 2026. It does not constitute tax, legal, investment or financial advice, and rates, terms and regulatory positions are subject to change. Clients should obtain specific advice, including from a tax adviser in their country of residence, before acting.
About Biz2India.in — NRI Taxation, FEMA & Regulatory Services
Biz2India.in’s dedicated NRI Desk advises NRI individuals and families across the globe on Indian income tax, FEMA/RBI regulatory matters, repatriation, property, and cross-border compliance. Our team tracks RBI and CBDT developments closely so our clients can act on time-bound opportunities like this one with confidence.
For feedback on this note, or to discuss how the FCNR(B) window applies to your specific situation, please write to us at info@biz2india.in or visit www.biz2india.in.