RBI Priority Sector Lending Amendment 2026 – FCNR NRE Deposits

What Happened?

On September 11, 2026, the Reserve Bank of India (RBI) issued the Priority Sector Lending – Targets and Classification Third Amendment Directions, 2026. This is a critical regulatory update that modifies the earlier Second Amendment issued on August 7, 2026. The main change: the deadline for excluding certain advances from Adjusted Net Bank Credit (ANBC) calculation has been reduced from September 30, 2026 to August 31, 2026.

This amendment specifically affects advances extended by banks against fresh FCNR(B) deposits (Foreign Currency Non-Resident deposits) and NRE deposits (Non-Resident External deposits). These deposits must have a minimum tenor of three years, and the exclusion window has now been shortened by one month.

Background & Legal Context

To understand this amendment, you need to know the framework of Priority Sector Lending (PSL) under RBI regulations.

• What is ANBC? Adjusted Net Bank Credit is the denominator used to calculate whether a bank has met its Priority Sector Lending targets. RBI mandates that banks lend a certain percentage of their ANBC to priority sectors like agriculture, small industries, and retail trade.
• Why exclude certain advances? RBI periodically grants exemptions to certain advances from the ANBC calculation to manage liquidity and encourage specific types of deposits. In this case, advances against FCNR(B) and NRE deposits were exempted to boost foreign currency deposit mobilization during the June-August 2026 period.
• FCNR(B) Deposits: These are deposits in foreign currency held by NRIs. Fresh FCNR(B) deposits mobilized between June 8, 2026 and the original September 30, 2026 deadline (now August 31, 2026) qualified for exclusion.
• NRE Deposits: These are Non-Resident External deposits in Indian Rupees. Fresh NRE term deposits of three years or more, mobilized between June 19, 2026 and the original deadline, also qualified for exclusion.
• Regulatory Reference: This amendment modifies the Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2025, which is the governing regulation. The amendment also cross-references the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements in related RBI directions.

The Income Tax Act 2025 does not directly govern PSL compliance; however, for NRI depositors, the tax treatment of interest on FCNR(B) and NRE deposits is relevant under Section 92A (transfer pricing for NRIs) and Section 197 (TDS on NRI deposits) of the Income Tax Act 2025.

What Does This Mean for You?

The impact of this amendment varies depending on who you are:

For Scheduled Commercial Banks:

The shortened exclusion window (ending August 31, 2026 instead of September 30, 2026) means:

• Advances extended after August 31, 2026 against fresh FCNR(B) and NRE deposits will NOT be excluded from ANBC calculation. These advances will count toward PSL targets.
• Banks must now recalculate their ANBC and PSL compliance for the financial year ending March 31, 2027 (AY 2026-27). Any advances extended between September 1, 2026 and March 31, 2027 against these deposits will be included in the denominator, potentially affecting PSL compliance ratios.
• Banks that were planning to extend advances against NRE/FCNR(B) deposits to manage PSL targets must now accelerate these decisions. If a bank has already extended such advances after August 31, 2026, they will face a higher ANBC base and must ensure their overall PSL lending meets the minimum percentage requirement.
• For banks with tight PSL compliance, this could mean either (a) increasing absolute PSL lending, or (b) negotiating regulatory relief, or (c) facing penalties under RBI regulations.

For Non-Resident Indians (NRIs) and Foreign Investors:

While this amendment is primarily regulatory for banks, it has indirect implications:

• Interest Income Tax Treatment: NRIs holding FCNR(B) and NRE deposits must understand the tax on interest earned. Under Section 64 of the Income Tax Act 2025, interest on these deposits is taxable in India. The TDS rate is typically 20% (or 10% with lower rates under DTAA in certain cases). The amendment does not change this tax treatment, but it signals RBI's policy on managing these deposits.
• FCNR(B) Deposit Returns: The shortened window may reduce banks' incentive to offer competitive rates on FCNR(B) deposits after August 31, 2026. NRIs should lock in rates before this deadline if they are depositing fresh funds.
• Repatriation Benefits: FCNR(B) deposits have full repatriation benefits under FEMA regulations, meaning NRIs can freely repatriate principal and interest. The amendment does not affect this; it only impacts the regulatory treatment within RBI's PSL framework.

For Tax Assessment Perspective (AY 2026-27):

From an income tax standpoint, taxpayers (especially NRIs) must ensure proper documentation of:

• Interest earned on FCNR(B) and NRE deposits during AY 2025-26 and AY 2026-27
• TDS certificates (Form 16A) issued by banks
• Currency fluctuation gains/losses (if applicable for FCNR(B))
• Bank statements showing deposits were actually fresh deposits and renewed upon maturity (as per the RBI amendment language)

What Should You Do Now?

If You Are a Bank:

1. Immediate Action: Review all advances extended against FCNR(B) and NRE deposits mobilized between June 8, 2026 (for FCNR) and June 19, 2026 (for NRE) up to August 31, 2026. These are still eligible for ANBC exclusion if the deposits are three years or more in tenor and were actually renewed upon maturity.
2. Recompute ANBC: From September 1, 2026 onwards, any new advances against fresh FCNR(B)/NRE deposits must be included in ANBC calculation. Recalculate your PSL compliance percentage with the updated ANBC denominator.
3. PSL Strategy: If the shortened window creates PSL compliance risk, increase absolute lending to priority sectors or seek RBI's written clarification on interim compliance measures.
4. Documentation: Maintain clear records separating (a) advances eligible for exclusion (mobilized before August 31, 2026), and (b) advances subject to inclusion (mobilized from September 1, 2026 onwards).
5. Internal Communication: Notify your lending, treasury, and compliance teams of the new deadline immediately, as the amendment is effective from September 11, 2026.

If You Are an NRI Depositor:

1. Lock in Rates: If you are considering fresh FCNR(B) deposits, finalize deposits before August 31, 2026 to benefit from any exclusion-related competitive rates banks may offer.
2. Renewal of Deposits: The amendment clarifies that "renewed upon maturity" deposits also qualify. If your existing FCNR(B) or NRE deposit matures before August 31, 2026, renewing it will still fall under the exclusion benefit.
3. Tax Compliance: Ensure you receive and file TDS certificates (Form 16A) for all interest earned. Keep bank statements and deposit confirmation letters for tax audit purposes during AY 2026-27.
4. Repatriation Planning: The amendment does not change repatriation rules, so you can freely repatriate principal and interest after the deposit tenor expires.

If You Are an Individual Taxpayer:

If you hold indirect exposure through bank investments or are concerned about GST on banking services, note that this RBI amendment does not directly change GST treatment. Interest on deposits is GST-exempt under standard banking service rules.

Key Takeaways

• Deadline Shortened: The exclusion window for FCNR(B) and NRE deposit advances from ANBC calculation has been reduced by one month—from September 30, 2026 to August 31, 2026, effective immediately from September 11, 2026.
• Banks Must Recalculate PSL Targets: From September 1, 2026, advances against fresh FCNR(B)/NRE deposits will be included in ANBC, potentially increasing the PSL lending requirement for banks in absolute terms.
• Renewed Deposits Still Qualify: Deposits renewed upon maturity before August 31, 2026 are still eligible for exclusion, even if the original deposit was mobilized before June 2026.
• NRI Tax Treatment Unchanged: The interest on FCNR(B) and NRE deposits remains taxable in India under Section 64 of the Income Tax Act 2025, with TDS at 20% (or treaty rates). This amendment does not alter tax treatment.
• Compliance Window Critical: Banks and NRIs must act within the August 31, 2026 deadline to benefit from the PSL exclusion framework. After this date, regulatory treatment changes, potentially affecting deposit rates and PSL compliance strategies.

Bottom Line: This RBI amendment is a technical but important regulatory adjustment for banks managing Priority Sector Lending compliance and NRIs managing deposit strategies. The one-month shortening of the exclusion window signals RBI's intent to normalize liquidity management post-August 2026. Banks must quickly adjust their internal systems, and NRIs should prioritize deposit renewals before August 31, 2026 to remain under the exclusion umbrella.

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