FEMA 3(R): Rupee Loans to NRIs and Loans Against NRE/FCNR Deposits - What the Rules Actually Allow

Most NRIs assume that once they move abroad, borrowing in India becomes either impossible or a grey area. Neither is true. The Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, notified as FEMA 3(R)/2018-RB on 17 December 2018 and amended up to 16 February 2026, set out a precise list of who may lend to an NRI, in which currency, for what purpose, and where the money must go when it is repaid. This guide covers those rules, the tax position and the account mechanics.

The short version: an authorised dealer (AD) bank in India may lend rupees to an NRI or OCI cardholder; a resident relative may lend rupees within the Liberalised Remittance Scheme (LRS); overseas branches of Indian banks may lend foreign currency against NRE and FCNR(B) deposits; and a resident may borrow up to USD 250,000 from relatives abroad. Every one of these routes carries the same set of banned end-uses, listed in Regulation 3A.

FEMA / DTAA Position

The statutory base

FEMA 3(R) was issued under clauses (a), (d) and (e) of Section 6(3) and Section 47(2) of the Foreign Exchange Management Act, 1999. Section 6 of the Act is the gatekeeper: a capital account transaction needs RBI permission unless it is specifically permitted, and the borrowing and lending regulations are that specific permission. The current consolidated text is published by the Reserve Bank at rbi.org.in (Notification 11441).

Amendments followed on 26 February 2019, 24 May 2021, 28 July 2022 and 6 October 2025. Under Regulation 9, loans taken under the superseded FEMA 3/2000-RB and 4/2000-RB rules continue to their original due date.

The four routes that matter to an NRI family

Regulation 7(A)(i): bank loans in rupees

Under Regulation 7(A)(i), an AD bank in India "may grant loan to a NRI/OCI Cardholder for meeting the borrower's personal requirements/own business purposes/acquisition of a residential accommodation in India/acquisition of motor vehicle in India/or for any purpose as per the loan policy laid down by the Board of Directors of the AD". The loan must comply with RBI prudential guidelines, and the bank must ensure the funds are not used for restricted end-uses. That covers the typical NRI home loan, car loan or personal loan.

Regulation 7(B)(iii): lending within the family

Regulation 7(B)(iii) allows a resident individual to grant a rupee loan to an NRI or OCI cardholder relative "within the overall limit under the Liberalised Remittance Scheme". The FEMA Section 6 brief puts the LRS ceiling at USD 250,000 per financial year for residents, so a parent in Pune lending to a son in Toronto must count that loan against the same USD 250,000 they would use for overseas investments, tuition or travel.

Regulation 5(A)(iv): forex loans against NRE and FCNR deposits

Regulation 5(A)(iv) lets branches outside India of AD banks extend foreign exchange loans "against the security of funds held in NRE/FCNR deposit accounts", provided those accounts are maintained under the Foreign Exchange Management (Deposit) Regulations, 2016 (FEMA 5(R)/2016-RB dated 1 April 2016). In practice, an NRI in Dubai with an FCNR(B) deposit in a Mumbai branch can borrow dirhams or dollars from that bank's overseas branch without breaking the deposit. Loans and overdrafts in India against NRE or FCNR funds are governed separately by the same 2016 Deposit Regulations, as Regulation 6(B)(v) of FEMA 3(R) makes explicit.

Regulation 3A: the banned end-uses

Regulation 3A lists nine purposes for which borrowed funds "shall not be utilised" in India. For an individual NRI borrower, the relevant ones are:

The definitions section repeats the same idea at clause (xiv), naming "investment in capital market including margin trading and derivatives" as a restricted end-use. A Rs 50 lakh personal loan parked in equity funds breaches it.

Where the DTAA comes in

FEMA governs whether the loan is allowed; the Double Taxation Avoidance Agreement (DTAA) governs who taxes the interest. It matters mainly when an NRI relative lends to a resident under Regulations 4(B)(v) or 6(B)(vi) and interest flows abroad. Treaty interest rates are 15% for the United States (in force from 12 September 1991) and the United Kingdom (26 October 1993), and 12.5% for the UAE (22 September 1993).

Tax Treatment in India

Interest paid by the NRI borrower

When an NRI borrows from an Indian bank to buy a house in India, the interest is the borrower's cost, not income, so no Indian tax is withheld on it. The question is whether the NRI can deduct it. Section 24(b) of the Income-tax Act, 1961 caps the deduction at Rs 2 lakh a year for a self-occupied property. For a let-out flat, interest is deductible without a cap, but Section 71(3A) limits the set-off of the resulting house-property loss against other heads to Rs 2 lakh. Use the rental income tax calculator to model both cases.

Worked example: an NRI in London borrows Rs 60 lakh at 9% to buy a flat in Bengaluru for self-occupation by their parents. First-year interest is roughly Rs 5.4 lakh, but only Rs 2 lakh of it is deductible under Section 24(b) if the property is treated as self-occupied.

Interest received by a resident lender

Under Regulation 7(B)(iii), when a resident parent lends to an NRI child, any interest the child pays is the parent's income, taxed in India at the parent's slab rate. Under the new regime for FY 2025-26, slabs run from nil up to Rs 4 lakh, 5% from Rs 4 lakh to Rs 8 lakh, 10% to Rs 12 lakh, 15% to Rs 16 lakh, 20% to Rs 20 lakh, 25% to Rs 24 lakh and 30% above Rs 24 lakh, per RATE_CONFIG. A Section 87A rebate of up to Rs 60,000 applies where total income is within Rs 12 lakh.

Interest paid to an NRI lender: Section 195

Where a resident borrows from an NRI relative (Regulation 4(B)(v) in foreign currency, or 6(B)(vi) in rupees) and pays interest, the payer must withhold TDS under Section 195. The section brief is clear: withholding is at the DTAA rate or the rate in the Income-tax Act, whichever is lower, provided the NRI lender furnishes a Tax Residency Certificate. Remittances also need Form 15CA/15CB where applicable.

Worked example: a resident in Chennai borrows Rs 10 lakh from a US-resident brother at 8% a year. Annual interest is Rs 80,000. Applying the 15% India-US treaty rate, TDS is Rs 12,000, and the brother receives Rs 68,000 in his NRO account.

Surcharge and cess

Surcharge on base tax is 10% between Rs 50 lakh and Rs 1 crore of income, 15% between Rs 1 crore and Rs 2 crore, and 25% between Rs 2 crore and Rs 5 crore. Above Rs 5 crore, the new regime caps surcharge at 25%. Health and education cess of 4% is then levied on tax plus surcharge. Run the NRI tax calculator to see the combined figure.

NRE and FCNR deposits used as collateral

Pledging a deposit does not change its tax character. Interest on an NRE account remains exempt under Section 10(4)(ii), and interest on an FCNR(B) deposit remains exempt for a non-resident, as described in the NRE account glossary entry. The loan interest you pay against that collateral is a separate matter and is not set off against the exempt deposit interest. The Income Tax Department's e-filing portal at incometax.gov.in carries the 1961 Act's current text and non-resident filing guidance.

Tax Treatment Abroad

Foreign tax credit

Most NRIs are tax residents of their host country on worldwide income. If an NRI lender in the United States receives Rs 80,000 of interest from a resident brother and suffers Rs 12,000 Indian TDS, the US return reports the full interest, and Article 24 of the India-US treaty allows a foreign tax credit for the Indian tax, generally limited to the US tax on that income. The foreign tax credit calculator estimates this.

In the UAE there is no personal income tax to credit the Indian TDS against, so the Indian withholding is the final cost.

Repatriation Mechanics

Where repayment must land

Repatriation is where most family loans go wrong. Regulation 6(B)(vi), inserted by amendment, lets a resident individual borrow in INR from an NRI or OCI cardholder relative for use in India, but on two conditions: the loan must arrive by inward remittance or by debit to the lender's NRE, NRO, FCNR(B) or SNRR account, and the borrowing is on a non-repatriation basis, meaning "payment of interest and repayment of principal shall be made only to the NRO account of the lender".

Getting money out of the NRO account

Because family rupee-loan repayments must go to an NRO account, the NRI lender who wants the money abroad then has to repatriate from NRO. That is capped at USD 1 million per financial year, needs Form 15CA/15CB, and requires taxes to be paid first. Model the outflow on the repatriation calculator.

Change of residence mid-loan

Regulation 8 handles status changes. Under 8(i), a bank may let a loan to a resident continue after the borrower becomes non-resident. Under 8(ii), if a resident lent to another resident and the lender later emigrates, repayment goes to the lender's NRO account. Under 8(iii), if an NRI lent to a resident and later returns to India, repayment may go to the lender's designated account in India at the lender's option. Under 8(iv), a returning NRI may keep servicing loans taken abroad, subject to RBI terms. Our recent guide on redesignating resident accounts as NRO covers the account side of that change, and the RFC account guide covers what happens on return.

FAQ

Can an NRI take a personal loan from an Indian bank?

Yes. Regulation 7(A)(i) of FEMA 3(R)/2018-RB allows an AD bank in India to lend rupees to an NRI or OCI cardholder for personal requirements, own business, a residential property or a motor vehicle in India, or any purpose in the bank's board-approved policy, subject to RBI prudential norms and the Regulation 3A end-use bans.

Can I take a loan against my NRE or FCNR deposit without breaking it?

Yes. Regulation 5(A)(iv) allows overseas branches of Indian AD banks to give foreign currency loans secured by NRE or FCNR(B) funds held under FEMA 5(R)/2016-RB dated 1 April 2016. Loans in India against such deposits are governed by the same 2016 Deposit Regulations; the exact margin and tenure depend on the bank's policy.

Can my parents in India lend me money while I live abroad?

Yes. Regulation 7(B)(iii) permits a resident individual to grant a rupee loan to an NRI or OCI cardholder relative within the overall LRS limit, which is USD 250,000 per financial year. The loan counts against the parent's LRS headroom for that year.

Can I lend money to my brother in India and get it back abroad?

Partly. Under Regulation 6(B)(vi), a rupee loan to a resident relative is on a non-repatriation basis: interest and principal can be repaid only to your NRO account. You can then repatriate from NRO within the USD 1 million annual limit after taxes, with Form 15CA/15CB.

Can I use a loan to invest in Indian shares or mutual funds?

No. Regulation 3A(1)(g) bars borrowed funds from being used for transacting in listed or unlisted securities, and the definitions clause (xiv) separately names capital-market investment including margin trading and derivatives as a restricted end-use.

What TDS applies if a resident pays me interest on a loan?

Under Section 195 of the Income-tax Act, 1961, the payer withholds at the DTAA rate or the Act rate, whichever is lower. The treaty interest rate is 15% for the United States and United Kingdom and 12.5% for the UAE, provided you furnish a Tax Residency Certificate.

What happens to my loan if I return to India permanently?

Regulation 8(iv) allows a returning NRI to keep servicing loans taken overseas as a non-resident, subject to RBI terms. If you lent to a resident as an NRI, Regulation 8(iii) lets repayment go to your designated account in India at your option.

This article explains the regulations as published by the Reserve Bank of India and is not legal or tax advice. FEMA 3(R) is amended periodically; confirm the current text at rbi.org.in and with your bank before acting.