Hidden risks of FCNR (B) deposit investment and leverage: Why high interest rates may not tell the full story

Foreign Currency Non-Resident (Bank) or FNCR (B) deposits have been attracting huge US dollar investments ever since the government announced that it would bear the hedging cost on 3–5-year deposits. Major banks have raised their FCNR (B) fixed deposit (FD) rates on 3-5-year tenures, and banks like HSBC Bank are even offering a whopping 19X leverage on these deposits. This has led to a huge influx of US dollars investments into FCNR (B) deposits.

According to a Reserve Bank of India (RBI) update in early August, as of July 31, 2026, the value of FCNR (B) deposits in India reached USD 36,725 million, marking a staggering 111% increase from the RBI’s previous update of USD 17,406 million on July 20, 2026. Many investors might think that those putting money in FCNR (B) are enjoying a fantastic opportunity with the government bearing the hedging costs and banks offering substantial leverage.

However, it’s important to remember that hardly any investment is risk-free, no matter how attractive it seems. Experts are highlighting the hidden risks of investing in FCNR (B) that every Non-Resident Indian (NRI) or Overseas Citizens of India (OCI) investor should be aware of.


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Who should invest in FCNR (B) and what are the risks involved?

Adhil Shetty, CEO, Bankbazaar, told ET Wealth Online that FCNR(B) deposits are well suited for NRIs who already hold savings in an eligible foreign currency, but investors should evaluate beyond the interest rate.

Shetty says they should consider whether the deposit fits their currency needs, as converting funds solely for investing may involve conversion costs and exchange rate movements. If the end use is in a different currency, you need to evaluate the pros and cons.

Shetty reveals that one should be aware that profits from such deposits are taxed. “While the interest is tax-free in India for eligible NRIs, it may be taxable in the country where they reside, which can affect post-tax returns,”

Shetty says liquidity is another consideration.

“Although premature withdrawals are permitted, withdrawing before one year earns no interest, and banks may apply their own terms thereafter," says Shetty.

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Tanvi Kanchan, associate director, Anand Rathi Shares & Stock Brokers, and Anand K Rathi, co-founder of MIRA Money, further explain the hidden risks of investing in FCNR (B) deposits.

Currency risk of investing in FCNR (B) deposits

Kanchan pointed out to ET Wealth Online that currency risk is counterintuitive if they actually need money in dollars or pounds down the line as the FCNR (B) deposit only protects an investor from rupee depreciation. .

“If you'll eventually convert back to rupees for property, family expenses, or repatriation, you haven't avoided currency risk, you've just moved it to the point of conversion, and an adverse forex move at maturity can erase a chunk of the interest earned,” says Kanchan.

Liquidity and premature withdrawal risk in FCNR (B) deposits

Rathi advises investors to understand the terms for premature closure of FCNR (B) deposits, including applicable penalties.

Giving an example, Rathi says if an investor needs to exit before the agreed upon maturity date, a premature-withdrawal penalty on the deposit or a prepayment charge on the loan could reduce the expected returns.

Kanchan points out that liquidity is an underappreciated risk since 3 or 5-year deposits are not accessible on demand, and premature withdrawal usually means the interest rate reverts to a much lower applicable slab for the period actually held.

Kanchan says it can be an expensive exit if your circumstances change mid-tenure.

Leverage risk in FCNR (B) deposit investment

Banks offer leverage on FCNR (B) deposits. For example, HSBC Bank is offering 19x leverage, which means on a $10,000 deposit, an investor can take up to $1,90,000 loan. It can increase the overall profit to a great extent if the loan rate of the leverage is lesser than the deposit rate.

But Kanchan says that it’s one aspect of the investment as leverage also adds a layer of risk on investment.

“The spread between deposit and loan rates is typically thin, within 50 to 80 basis points so it doesn't take much to turn a positive carry trade negative: a floating-rate reset on the loan, a change in loan pricing, or an unexpected tax event can compress or wipe out the gain,” Kanchan explains.

Giving an example, Rathi says if the borrowing cost is 5.5%, while the deposit earns a 6% return, the 0.5% spread on the leveraged amount enhances the return on the investor’s own capital.

“However, if the borrowing rate rises, the spread can narrow or even turn negative, significantly reducing the effective return,” says Rathi.

Rathi also suggests that one should look at the loan setup costs, which depends on whether the borrowing is simple or compounding and whether the loan and deposit tenures are aligned.

“A structure may show an attractive spread between the deposit and borrowing rates, but once setup charges and other costs are factored in, the investor’s actual return may be considerably lower,” says Rathi.

Taxation on FCNR (B) returns and other taxes

While interest earned on FCNR (B) deposits is tax-free in India, investors might have to pay tax on it in their country of residence.

Kanchan says NRIs in the US find FCNR (B) interest fully taxable, with an additional 3.8% investment income tax layered on for higher earners, while loan interest on leveraged structures can face US withholding of up to 30% in the absence of proper treaty paperwork.

Describing another situation, Rathi says if an investor starts an FCNR (B) while they are an NRI and then they come back to India before the maturity date, during this time, if their living situation changes, the property may need to be reevaluated in terms of its tax treatment.

Kanchan says it’s not just about tax on gains, NRIs may also have to pay tax on other components of FCNR (B) investments.

Giving an example, Kanchan says that Singapore has recently clarified that loan interest paid by a Singapore tax resident to an Indian bank under leveraged structures can attract Singapore withholding tax, at the rate of 10% -15% depending on treaty relief, if the loan comes from certain branches rather than the bank's Singapore branch.

Rathi says if an FCNR (B) deposit generates a particular return but the investor’s country of residence taxes that income, the post-tax return could be significantly lower. “This is especially important in a leveraged structure because taxes may cut down on or even eliminate the gain from the interest-rate spread,” explains Rathi.

Rathi sums up by saying that the NRI should evaluate the FCNR (B) structure based on its post-tax, post-cost return and the risks associated with leverage and liquidity rather than simply looking at the headline return.