RBI Forex Swap Facility 2026: FCNR(B), ECB, OFCB Tax Impact

What Happened?

The Reserve Bank of India (RBI) launched a special USD-INR Forex Swap facility on June 8, 2026, designed to encourage foreign currency inflows through three channels: FCNR(B) deposits (Foreign Currency Non-Resident Bank deposits), External Commercial Borrowings (ECBs), and Overseas Foreign Currency Borrowings (OFCBs). As of August 21, 2026, the facility has attracted substantial forex inflows totalling USD 72,848 million, with FCNR(B) deposits leading at USD 65,397 million. The scheme remains open for FCNR(B) deposits until August 31, 2026, and for ECBs and OFCBs until December 31, 2026. This is a time-bound incentive to boost India's forex reserves during the current fiscal year (FY 2026-27).

Background & Legal Context

What is FCNR(B)?

FCNR(B) deposits are bank deposits made by Non-Resident Indians (NRIs) in foreign currency (typically USD, GBP, EUR, JPY). These are regulated under RBI guidelines and are completely exempt from exchange rate fluctuation risk as the maturity amount is guaranteed in the same foreign currency.

Income Tax Treatment Under Act 2025:

• Section 115AB (Interest from Foreign Currency Accounts): Interest earned on FCNR(B) deposits by NRIs is taxable under Section 115AB of the Income Tax Act 2025. The tax rate is a flat 20% on interest income, calculated on the interest earned in foreign currency and converted to INR at the exchange rate on the date of credit.
• Section 10(1)(vii) (Exemption for certain NRI income): While Section 10(1)(vii) provides exemption for certain residential income, FCNR(B) interest does not qualify under this exemption. It is specifically governed by Section 115AB.
• Section 92B (Transfer Pricing for External Borrowings): For Indian companies availing ECBs and OFCBs under this facility, Section 92B of the Income Tax Act 2025 mandates that interest paid on these borrowings must be at an "arm's length price." The RBI-linked swap facility may influence the arm's length rate determination for interest deductibility.
• Section 44D (Presumptive Income for Small Businesses): If an MSME or small business uses ECB funds for business purposes, they may claim presumptive income benefits under Section 44D, provided conditions are met.

GST Angle:

Financial services including deposits and borrowing arrangements are exempt from GST under Schedule III of the CGST Act 2017. However, if banks charge service fees (not part of interest), such fees may be subject to 18% GST. Taxpayers must separate interest from service charges in their documentation.

What Does This Mean for You?

For NRIs with FCNR(B) Deposits:

• Interest earned on FCNR(B) deposits is subject to 20% flat tax rate under Section 115AB, regardless of your overall income slab. The bank will deduct TDS at 20% before crediting interest to your account.
• If the deposit maturity amount includes accrued but uncredited interest, the interest component becomes taxable in the financial year it is credited to your account (not on accrual basis).
• Exchange gains or losses on conversion of the maturity amount from foreign currency to INR are treated as capital gains/losses under Sections 45-47 of the Income Tax Act 2025, subject to separate tax treatment based on holding period (short-term or long-term).
• You are required to file an Income Tax Return (ITR) reporting this income in AY 2026-27 if total income exceeds the filing threshold, even if TDS is deducted.

For Indian Companies Availing ECBs and OFCBs:

• Interest paid on external borrowings is deductible under Section 37(1) of the Income Tax Act 2025, provided it is incurred wholly and exclusively for business purposes.
• The arm's length nature of interest rates is crucial. Under Section 92B, you must maintain contemporaneous Transfer Pricing documentation proving that the interest rate charged is comparable to rates on similar borrowings in the open market. The RBI swap facility rate becomes a reference point for determining arm's length rates in Advance Pricing Agreements (APAs).
• The debt-equity ratio limits under Section 94(7) apply. If your foreign debt exceeds 2:1 ratio to equity, excess interest may be disallowed. Ensure your capital structure complies with this restriction.
• Withholding Tax (TCS/TDS) obligations: If you remit interest abroad, TDS must be deducted at applicable rates (typically 20% for royalties/technical fees, 5% for interest under tax treaties) as per Sections 193-194.
• Loan repayment may trigger foreign exchange implications. Any exchange gain arising on repayment in INR is taxable as capital gain under Section 47(vi) in the year of repayment.

For Banks and Financial Institutions:

• Banks facilitating FCNR(B) deposits must collect and remit TDS at 20% on interest accruals. Ensure proper documentation and timely deposit of tax with the Directorate.
• Administrative burdens include tracking forex swap transactions, maintaining separate accounts, and reconciling swap data with RBI returns.

What Should You Do Now?

Action Items for NRIs:

• Open or renew FCNR(B) deposits by August 31, 2026 if you wish to benefit from this time-bound RBI facility. Beyond this date, the swap arrangement expires and standard FCNR(B) rates will apply.
• Obtain TDS Certificates (Form 16A) from your bank showing the 20% tax deducted on interest. Use this to claim credit in your ITR for AY 2026-27.
• File ITR-2 (if you have foreign income) disclosing FCNR(B) deposits, interest earned, and TDS paid. Include Schedule FA (Foreign Assets) detailing the deposit amount in foreign currency and converted INR value.
• Maintain bank statements showing interest credits, as these are evidence for the income declared.
• Plan currency conversion timing strategically. If you expect INR appreciation, you may defer conversion to minimize exchange loss (though exchange loss is not deductible for individuals under current rules).

Action Items for Indian Companies:

• Pre-approval from Board before availing ECB/OFCB to ensure compliance with corporate governance norms.
• File ECB approval with Authorized Dealer Banks (typically within 15 days of drawdown) under RBI's Liberalized Remittance Scheme or ECB guidelines.
• Prepare Transfer Pricing documentation before September 30, 2026 (deadline for AY 2025-26 ITR filing; adjust for your audit cycle). Reference the RBI swap facility rate and comparable borrowings to justify the arm's length interest rate.
• Comply with debt-equity ratio norms in Schedule VI of your Balance Sheet. File Form 3CEB (signed by your Chartered Accountant) along with ITR-4S/ITR-5 confirming compliance with Section 92B (Transfer Pricing) and Section 94(7) (debt-equity ratio).
• Track TDS/TCS obligations on remittance of interest abroad. Deduct TDS within the due date and file Monthly TDS Return (Form 24G) with the Directorate.
• Maintain bank confirmations and swap confirmation notes from RBI-appointed dealers to substantiate the facility utilization.

Immediate Compliance Calendar:

• By August 31, 2026: Close window for FCNR(B) deposits under this facility.
• By December 31, 2026: Last date to avail ECB/OFCB under the RBI swap facility.
• By September 30, 2026 (tentative): File ITR for AY 2025-26 declaring prior-year FCNR(B) interest and ECB borrowings.
• By December 31, 2026 onwards: Begin filing AY 2026-27 returns in July 2027 (after FY 2026-27 closes), disclosing all FCNR(B) and ECB income/deductions accrued in FY 2026-27.

Key Takeaways

• FCNR(B) interest taxed at flat 20% under Section 115AB — NRIs cannot benefit from lower tax slabs. TDS is deducted at source by banks.
• ECBs and OFCBs attract Transfer Pricing scrutiny — Arm's length interest rates must be documented using comparable data; non-compliance risks interest disallowance under Section 92B.
• Debt-equity ratio cap of 2:1 applies to foreign borrowings — Excess interest may be disallowed under Section 94(7); compliance is mandatory for Indian companies.
• Exchange gains/losses on FCNR(B) conversion treated as capital gains — Tax treatment depends on holding period (short-term vs. long-term); proper ITR disclosure required under Schedule CG.
• RBI facility expires by August-December 2026 — Act urgently if you plan to utilize this window; after expiry, standard FCNR(B) and ECB rates apply, reducing arbitrage benefits.

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602