NRE vs NRO vs FCNR(B): How FEMA Deposit Rules Decide Repatriation and Taxability for NRIs

For a Non-Resident Indian, the decision to open an NRE, NRO or FCNR(B) account is not a banking preference; it is a choice made under the Foreign Exchange Management Act 1999. The rulebook is the Reserve Bank of India's Master Direction No. 14/2015-16 on Deposits and Accounts, which operationalises Notification No. FEMA 5(R)/2016-RB dated 01 April 2016. That single regulation decides how much money you can send abroad, whether your interest is taxed, and what currency risk you carry. Getting the account wrong can trap current income behind a USD 1 million per financial year ceiling or expose exempt interest to a 30% deduction at source.

This explainer, current to the RBI framework as updated on 29 June 2026, sets out the three account types side by side and the exact FEMA and Income-tax Act 1961 provisions behind each. If you want to model the numbers first, our NRI income tax calculator applies the FY 2025-26 slabs and surcharge to your Indian income before you decide where the money should sit.

FEMA / DTAA Position

The governing instrument is the FEM (Deposit) Regulations 2016, notified as FEMA 5(R)/2016-RB on 01 April 2016 and consolidated in RBI Master Direction No. 14/2015-16. Under this regulation a person resident outside India, as defined in Section 2(w) of FEMA 1999, may hold three deposit types with an authorised dealer bank in India: the Non-Resident (External) Rupee account, the Non-Resident Ordinary Rupee account, and the Foreign Currency Non-Resident (Bank) account.

Eligibility itself is a FEMA question. All three accounts may be opened only by a person resident outside India, and each may be held jointly with another NRI or, in the case of NRE and FCNR(B), with a resident close relative on a "former or survivor" basis. A resident Indian cannot be an ordinary joint holder in an NRE or FCNR(B) account, a restriction that flows directly from FEMA 5(R)/2016-RB dated 01 April 2016.

The distinction that matters most under FEMA is repatriability. An NRE account is a rupee account whose principal and interest are fully and freely repatriable, with no annual ceiling. An NRO account is designed to receive India-source income such as rent, pension and dividend, and its balance is repatriable only up to USD 1 million per financial year under Regulation 4(2). An FCNR(B) deposit is a foreign-currency term deposit with a tenor of one to five years and is, like the NRE account, fully repatriable.

The DTAA layer sits on top of FEMA and matters only for the taxable NRO stream, because NRE and FCNR(B) interest is already exempt in India. Under the India-United States treaty in force since 12 September 1991, interest is taxable at a maximum of 15%; the India-United Kingdom treaty (effective 26 October 1993) mirrors that 15% cap; the India-UAE treaty (effective 22 September 1993) caps interest at 12.5%. Note that no treaty makes NRO interest "exempt"; India retains a taxing right in every case, and on capital gains the residual Indian rate is 12.5% even under the most generous treaty.

Tax Treatment in India

The tax outcome flows directly from Section 10(4)(ii) of the Income-tax Act 1961. Interest earned on an NRE account, and equally on an FCNR(B) deposit, is exempt from Indian income tax so long as the account holder qualifies as a person resident outside India under FEMA. Because the interest is exempt, there is no tax deducted at source on it; the bank credits the gross amount.

The NRO account is the mirror image. Its interest is fully taxable in India and attracts TDS under Section 195 of the Income-tax Act 1961 at 30%, before the addition of the applicable surcharge and the 4% health and education cess. This is a materially heavier deduction than the 10% that applies to a resident's fixed deposit under Section 194A, which is why leaving India-source income in an NRO account without treaty relief is costly. You can size the liability on rental income specifically using our NRI rental income tax calculator before the tenant deducts TDS at source.

Surcharge stacks on top of the base 30% wherever the NRI's total income is high. Under the FY 2025-26 schedule the surcharge is 10% on income between Rs 50 lakh and Rs 1 crore, 15% between Rs 1 crore and Rs 2 crore, and 25% between Rs 2 crore and Rs 5 crore. In the new tax regime the surcharge is capped at 25% even above Rs 5 crore, so the steeper top surcharge of the old regime does not apply to a new-regime taxpayer. The surcharge therefore matters most for high-rent or high-dividend NRO holders.

A further practical point sits between FEMA and pricing: since the RBI deregulated the ceiling, banks set NRE and NRO savings and term-deposit rates freely, while FCNR(B) rates are benchmarked to the relevant overnight alternative reference rate plus a bank-set spread within RBI limits. The exempt status of NRE interest under Section 10(4)(ii) means its post-tax yield often beats an NRO deposit of the same headline rate once the 30% Section 195 deduction is applied to the latter.

To claim the treaty rate rather than 30%, the NRI must furnish Form 10F together with a valid Tax Residency Certificate from the country of residence, as required under Section 90(4). Without that documentation the bank is obliged to deduct at the full domestic TDS rate, and the NRI must then claim the excess as a refund by filing an Indian return.

Tax Treatment Abroad

The exemption under Section 10(4)(ii) is a domestic Indian exemption only; it carries no weight in the country where the NRI is tax-resident. A United States tax resident, taxed on worldwide income, must declare NRE and FCNR(B) interest on the US return even though India levied nothing. The India-US DTAA, in force since 12 September 1991, offers foreign-tax-credit relief under its Article 24, but a credit is only useful where a foreign tax was actually paid; since India charged zero on NRE interest, there is no Indian tax to credit against the US liability.

The position is friendlier for residents of the UAE, which levies no personal income tax on individuals; NRE and FCNR(B) interest that escapes Indian tax under Section 10(4)(ii) therefore escapes tax entirely for a genuine UAE resident. That said, the India-UAE treaty (effective 22 September 1993) requires proof of a UAE establishment for the Tax Residency Certificate, so a paper residence will not survive scrutiny by the Indian assessing officer.

For NRO interest, the foreign-tax-credit mechanism does real work. If India has already deducted 15% under the India-UK treaty (in force from 26 October 1993), a UK resident can generally credit that 15% against the UK tax on the same interest, avoiding economic double taxation. The credit is capped at the lower of the Indian tax paid and the home-country tax on that income, which is the standard ordinary-credit method used across India's treaty network.

Repatriation Mechanics

Repatriation is where the three accounts diverge most sharply, and it is governed entirely by FEMA 5(R)/2016-RB rather than by tax law. From an NRE account, both principal and interest move abroad freely and instantly, with no ceiling and no certificate; this is the single biggest reason NRIs route fresh foreign earnings through NRE rather than NRO. An FCNR(B) deposit repatriates on the same free basis, with the added benefit that the money never touched the rupee, so there is no exchange loss on the way out.

The NRO account is deliberately constrained. Balances representing current income such as rent, interest or dividend can be remitted after tax, but drawing down the corpus, for instance the sale proceeds of an inherited flat, is capped at USD 1 million per financial year under Regulation 4(2) of FEMA 5(R)/2016-RB. That ceiling is per person across all NRO accounts and all Indian assets, not per account, so splitting money across banks does not enlarge it. Our NRI repatriation calculator helps you plan drawdowns against that annual limit.

Inherited and gifted assets deserve special care. Sale proceeds of property inherited by an NRI, once credited to an NRO account, count within the same USD 1 million per financial year envelope under Regulation 4(2); there is no separate additional allowance for inheritances. Where the inheritance itself came from a person who was resident in India, the authorised dealer bank will additionally seek documentary proof of the source before remitting, consistent with FEMA 5(R)/2016-RB.

Every outward remittance from an NRO account requires a self-declaration in Form 15CA and, above the prescribed threshold, a chartered accountant's certificate in Form 15CB confirming that the applicable tax has been paid, as mandated under Rule 37BB of the Income-tax Rules 1962. Banks will not process the SWIFT transfer without these forms. By contrast, remittances from NRE and FCNR(B) accounts, being of already-repatriable funds, do not need the 15CA/15CB pair for the principal.

FAQ

Can I keep an NRE account after returning to India permanently?

No. Under the FEM (Deposit) Regulations 2016, an NRE account must be redesignated as a resident rupee account, or transferred to an RFC account, promptly on your return to India for permanent residence. The interest exemption under Section 10(4)(ii) of the Income-tax Act 1961 ceases from the date you become a resident.

Is the USD 1 million repatriation cap applied per account or per person?

The USD 1 million per financial year ceiling under FEMA 5(R)/2016-RB applies per person across all NRO accounts and Indian assets combined, not per account. Repatriation beyond current-income items requires Form 15CA and, above the threshold, a chartered accountant's Form 15CB under Rule 37BB.

Which account gives me fully tax-free interest as an NRI?

Both NRE and FCNR(B) interest are exempt in India under Section 10(4)(ii) of the Income-tax Act 1961, provided you qualify as a person resident outside India under FEMA. NRO interest is fully taxable and suffers TDS under Section 195 at 30% plus surcharge and 4% cess.

Does the DTAA reduce the 30% TDS on my NRO interest?

Yes. By filing Form 10F with a valid Tax Residency Certificate under Section 90(4), the TDS under Section 195 can be lowered to the treaty rate on interest, which is 15% for the United States and United Kingdom and 12.5% for the UAE under the respective DTAAs.

Can an FCNR(B) deposit protect me from rupee depreciation?

Yes. An FCNR(B) is held in the foreign currency itself for a tenor of one to five years under the FEM (Deposit) Regulations 2016, so both principal and interest are insulated from rupee exchange-rate movement and remain fully repatriable at maturity.

Is NRE interest taxable in my country of residence abroad?

Very possibly. Section 10(4)(ii) exempts NRE interest only in India. A resident of the United States or United Kingdom must still declare the interest as worldwide income at home, and Article 24-type foreign-tax-credit relief does not help where India levied no tax to credit.

What happens to my accounts if I gain OCI status but stay abroad?

Nothing changes for FEMA deposit purposes. Residential status under FEMA turns on where you live and your intention, not on your OCI card; so long as you remain a person resident outside India, you continue to operate NRE, NRO and FCNR(B) accounts exactly as before under FEMA 5(R)/2016-RB.