Foreign Currency Non-Resident (Bank), or FNCR (B) deposits are attracting huge US dollar investment ever since the government announced that it would bear the hedging cost on 3–5-year deposits. Leading banks increased their FCNR (B) fixed deposit (FD) rates on 3-5-year tenures, while banks such as HSBC Bank announced offering a whopping 19X leverage on these deposits. Such moves drew huge US dollars investments to FCNR (B) deposits.As per a Reserve Bank of India (RBI) update early this month (August 2026), as on July 31, 2026, FCNR (B) deposits in India were worth USD 36,725 million, a 111% growth from the RBI’s July 20, 2026, update of USD 17,406 million. Many investors may believe that FCNR (B) investors are having a great time and its profitable investment till the government is bearing the hedging cost and banks offering a substantial leverage. Hardly any investment is risk-free however profitable it may appear. Experts discuss hidden risks of investing in FCNR (B) that every Non-Resident Indian (NRI) or Overseas Citizens of India (OCI) investor must be aware of.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 (if the end use is in a different currency you need to evaluate the pros and cons) and exchange rate movements.Shetty reveals that one should be aware of the taxation on profits from such deposits. “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.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) depositsKanchan told ET Wealth Online that the currency risk is counterintuitive as FCNR (B) deposit only protects an investor from rupee depreciation if they actually need money in dollars or pounds down the line.“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 risks in FCNR (B) depositsRathi advises investors to understand the terms for premature closure of FCNR (B) deposit, including applicable penalties.Giving an example, Rathi says if an investor needs to exit before the agreed maturity, a premature-withdrawal penalty on the deposit or a prepayment charge on the loan could reduce the expected returns.Kanchan opines 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 investmentBanks 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 extend if the loan rate of 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, withing 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.Another factor that Rathi suggests looking at is loan setup costs, which is based 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 taxesInterest earned on FCNR (B) deposits is tax-free in India. But investors might have to pay tax on the same 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 about just tax on gains, NRIs may also face 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 rates 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 saying that the key in an FCNR (B) deposit is to evaluate an 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.