EaseValueWhat Happened?
On August 25, 2026, the Reserve Bank of India (RBI) issued the Third Amendment Directions to the Commercial Banks – Interest Rate on Deposits Directions, 2025. The key change: the temporary relaxation on interest rate ceilings for FCNR(B) deposits (3-5 year tenors) and restrictions on NRE deposits (3 years and above) has been shortened by one month. The relaxation period now ends on August 31, 2026 instead of September 30, 2026. This amendment applies to both fresh deposits and deposits renewed upon maturity since June 17, 2026.
Background & Legal Context
To understand this RBI directive, it is essential to know the legal framework governing NRI deposits in India:
- Banking Regulation Act, 1949: Section 35A grants RBI the power to issue directions to commercial banks in the public interest. This amendment is issued under this authority.
- Income Tax Act, 2025: Section 194A deals with Interest on Deposits. For NRIs, deposits are classified as Non-Resident External (NRE) or Foreign Currency Non-Resident (FCNR(B)). Interest earned on NRE deposits is taxable in India but benefits from tax treaty provisions. For FCNR(B) deposits, interest is typically exempt under Section 10(15)(vii) for repatriation purposes.
- Previous RBI Framework (June 2026): The RBI had temporarily removed the interest rate ceiling on fresh FCNR(B) deposits with 3-5 year tenors to attract foreign currency inflows and manage external account pressures. Simultaneously, restrictions were imposed on NRE deposits to control domestic rupee outflows.
The earlier Directions dated November 28, 2025 (updated June 17, 2026) had permitted:
- Banks to offer any interest rate on fresh FCNR(B) deposits of 3-5 year tenors without RBI's ceiling
- Interest rate restrictions on NRE deposits of 3 years and above to control rupee depreciation pressure
These relaxations were temporary measures lasting until September 30, 2026. The August 25, 2026 amendment accelerates the end date to August 31, 2026, meaning stricter regulations return one month earlier.
What Does This Mean for You?
For NRI Taxpayers:
- FCNR(B) Deposit Holders: If you hold FCNR(B) deposits maturing after August 31, 2026, banks will apply the standard RBI interest rate ceiling from September 1, 2026 onwards. This means higher interest rates available now during June-August 2026 will no longer apply. For AY 2026-27, calculate your interest earnings carefully as rates will reduce post-August 31, 2026. Under Section 194A of Income Tax Act, 2025, banks will deduct TDS on this interest at 20% (or applicable treaty rate). Ensure you provide valid documentation to claim lower rates.
- NRE Deposit Holders: The restriction on interest rates for NRE deposits of 3+ years also ends on August 31, 2026. However, this restriction was limiting rates downward, so from September 1, 2026, banks may increase offered rates. This is actually beneficial for NRE depositors. For assessment purposes in AY 2026-27, your interest income will likely increase from September onwards.
- Deposit Renewal Risk: If your NRE/FCNR(B) deposit matures between June 17-August 31, 2026, the current relaxed rates apply upon renewal. If maturity occurs after August 31, 2026, you will face standard (likely lower) rates. Plan your renewal timing strategically.
For Commercial Banks:
- Banks must immediately update their deposit schemes and interest rate schedules effective September 1, 2026.
- RBI compliance officers must ensure no deposits renewed after August 31, 2026 are offered rates outside the ceiling/restriction framework.
- The one-month early termination of relaxation requires urgent communication to NRI depositors.
For Tax Compliance (AY 2026-27):
- Interest earned on NRE deposits is taxable under Section 56 (Income from other sources) in India. Your bank will issue Form 26AS showing TDS deducted under Section 194A at 20% (standard rate for non-residents).
- Interest on FCNR(B) deposits repatriated abroad may qualify for exemption under Section 10(15)(vii), but interest retained in India is taxable.
- If you are an NRI under Indian tax law (as per Section 6 of Income Tax Act, 2025), your worldwide income (including interest) is taxable in India if you spend more than 182 days in India in the financial year or 60 days combined in the current and 2 preceding years (with specific conditions).
- Your TDS credit will appear in Form 26AS. Match this with your bank statement and include interest income in your ITR-1 or ITR-2 filing for AY 2026-27.
What Should You Do Now?
- Check Your Maturity Dates: Review all FCNR(B) and NRE deposits held with Indian banks. Identify which mature before September 1, 2026 and which after. This determines the interest rate applicable under the old vs. new regime.
- Consult Your Bank: Contact your bank's NRI services department immediately to understand:
- Current interest rate on your deposit
- Rate applicable after August 31, 2026
- Whether you should renew before or after the deadline
Key Takeaways
- Effective Date: The amended directions take immediate effect from August 25, 2026. The relaxed interest rate regime for FCNR(B) and restrictions on NRE deposits end one month earlier—August 31, 2026 instead of September 30, 2026.
- FCNR(B) Impact: Higher interest rates available on 3-5 year fresh FCNR(B) deposits expire August 31, 2026. Lock in rates before this date if advantageous; otherwise, standard ceiling applies from September 1, 2026.
- NRE Deposit Impact: Rate restrictions lift one month early. Banks may increase offered rates from September 1, 2026, benefiting NRE depositors planning fresh deposits or renewals post-August 31.
- Tax Year AY 2026-27: Interest income splits across two rate regimes. Calculate income earned June-August 2026 (higher rates) separately from September 2026 onwards (normal rates). TDS deducted by banks under Section 194A at 20% will appear in Form 26AS.
- Action Required: NRI depositors must act before September 1, 2026. Contact banks, review maturity dates, decide on renewal timing, and ensure TDS documentation for ITR compliance. Early planning avoids last-minute rate lock-in challenges and ensures smooth AY 2026-27 tax filing.
Disclaimer: This analysis is based on RBI's Third Amendment Directions, 2026, and Income Tax Act, 2025 provisions as applicable on August 25, 2026. Tax implications vary based on individual residency status, treaty eligibility, and deposit classification. Consult a tax professional for personalized advice.
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