NRE vs NRO vs FCNR: Which Non-Resident Bank Account an NRI Should Open Under FEMA

An Indian passport-holder who moves abroad cannot legally keep running an ordinary resident savings account. Section 6 of the Foreign Exchange Management Act, 1999 (FEMA) requires Reserve Bank of India permission for most cross-border banking unless a facility is specifically permitted, and the RBI's own FAQ "Accounts in India by Non-residents", as updated on 16 January 2025, lists four permitted account types for a non-resident: NRE, NRO, FCNR(B) and SNRR. Picking the wrong one can cost an NRI a 30% tax deduction that a correctly structured account would have avoided entirely.

The choice turns on three variables: the currency you hold (rupees or foreign currency), the source of the money (income earned in India or funds remitted from abroad) and how freely you need to move the balance back out of India. This guide sets out the FEMA position, the exact Income-tax Act, 1961 sections that decide whether interest is taxed, how your country of residence taxes the same interest, and the repatriation ceilings that apply to each account. Every figure below is drawn from the RBI FAQ dated 16 January 2025, the Income-tax Act, 1961 and India's Double Taxation Avoidance Agreements (DTAAs).

FEMA / DTAA Position

Under FEMA, 1999 a "non-resident Indian" (NRI) is defined in the RBI FAQ of 16 January 2025 as a person resident outside India who is a citizen of India. A "person of Indian origin" (PIO) is a person resident outside India who is a citizen of any country other than Bangladesh or Pakistan and who meets the origin conditions. Nationals of Bangladesh and Pakistan need prior RBI approval before opening any of these accounts, a restriction stated expressly in the same FAQ.

Section 6 of FEMA, 1999 is the governing provision: capital-account transactions need RBI permission unless specifically permitted, and for resident individuals the Liberalised Remittance Scheme caps outward remittance at USD 250,000 per financial year. Once you become a non-resident, the NRE, NRO and FCNR(B) accounts are the "specifically permitted" channels that let you bank in India without seeking case-by-case approval. The three accounts differ on a single FEMA axis, repatriability, which is why the tax and remittance rules diverge so sharply.

DTAAs do not decide which account you open, but they cap the tax India may levy on the interest that account earns. India retains a taxing right on interest arising in India in every treaty; the cap is 15% under the India-United States DTAA (in force since 12 September 1991), 15% under the India-United Kingdom DTAA (in force since 26 October 1993) and 12.5% under the India-United Arab Emirates DTAA (in force since 22 September 1993). Note that on capital gains India retains a taxing right at 12.5% under these treaties; gains are never "exempt" for a resident of the USA, UK or UAE.

Tax Treatment in India

The single most important tax fact for an NRI is that the three accounts are taxed under different sections of the Income-tax Act, 1961. Interest on a Non-Resident External (NRE) rupee account is exempt from Indian income tax under Section 10(4)(ii), but only for so long as the account holder qualifies as a person resident outside India under FEMA. Interest on an FCNR(B) foreign-currency deposit is exempt under Section 10(15)(iv)(fa) of the same Act. Because both exemptions are absolute for a non-resident, banks deduct no tax at source on NRE or FCNR(B) interest.

The Non-Resident Ordinary (NRO) account is the opposite. Interest on an NRO account is fully taxable in India, and because the holder is a non-resident the deduction is made under Section 195 of the Income-tax Act, 1961 at 30%, increased by the applicable surcharge and a health and education cess of 4%. On a plain reading that turns Rs 1,00,000 of NRO interest into a Rs 31,200 deduction (30% plus 4% cess) before any surcharge, against zero on the same sum held in an NRE account.

Surcharge stacks on top of that 30% once income crosses the statutory thresholds: 10% of the base tax for total income above Rs 50 lakh, 15% above Rs 1 crore, 25% above Rs 2 crore, and a maximum of 25% in the new tax regime (the 37% slab does not apply in the new regime). For most NRIs whose only Indian income is NRO interest the surcharge is nil, but the 30% base rate plus 4% cess still applies from the first rupee, unlike the slab-based nil band a resident would enjoy.

An NRI can bring the NRO deduction down to the DTAA ceiling. To apply the treaty rate of 15% for a US or UK resident, or 12.5% for a UAE resident, in place of 30%, the account holder must furnish a valid Tax Residency Certificate (TRC) from the country of residence together with Form 10F, filed electronically on the income-tax portal. Without the TRC and Form 10F the bank must deduct the full 30% under Section 195.

Tax Treatment Abroad

Exemption in India does not always mean the interest is tax-free worldwide. A resident of a country that taxes worldwide income, such as the United States or the United Kingdom, must still declare NRE and FCNR(B) interest on the foreign return even though India levies nothing. The India-USA DTAA, in force since 12 September 1991, and the India-UK DTAA, in force since 26 October 1993, both operate on residence-based worldwide taxation, so a US or UK resident typically pays home-country tax on the full interest.

Where India has already deducted tax, for example the 15% withheld on NRO interest for a US resident, the foreign-tax-credit mechanism prevents the same income being taxed twice. Article 24 of the India-USA treaty and the equivalent relief article in the India-UK treaty allow the residence country to credit the Indian tax against its own liability, so a US resident who suffers 15% Indian TDS on NRO interest generally offsets that 15% against US federal tax on the same income.

The credit runs the other way for Indian-tax purposes too. Where an NRI later becomes a resident again and earns foreign interest, Rule 128 of the Income-tax Rules, 1962 grants a foreign tax credit on filing Form 67 before the return. For a resident of the United Arab Emirates the calculation is simpler: the UAE levies no personal income tax on individuals, so the 12.5% Indian cap under the India-UAE DTAA (in force since 22 September 1993) is usually the only tax an NRI in Dubai or Abu Dhabi pays on NRO interest, with no home-country top-up.

To claim the UAE's 12.5% rate the account holder needs a UAE Tax Residency Certificate, and the treaty notes require proof of a UAE establishment. This is why documentation, not the account label alone, decides the effective rate: the same NRO deposit yields a 30% deduction without a TRC and a 12.5% deduction with one for a verified UAE resident.

Repatriation Mechanics

Repatriation is where the NRE and FCNR(B) accounts earn their keep. Balances in both are fully and freely repatriable, principal and interest, without any annual ceiling, because the money originated abroad and was only parked in India. An NRI can move the entire NRE or FCNR(B) balance back to the country of residence at any time, subject only to the bank's remittance formalities.

The NRO account carries a hard FEMA limit. Under the RBI FAQ of 16 January 2025 an NRI or PIO may repatriate up to USD 1 million per financial year (the year running 1 April to 31 March) out of NRO balances, after payment of all applicable Indian taxes. The USD 1 million ceiling aggregates across all NRO accounts and covers current income such as rent and sale proceeds of assets, which is why NRO is the correct home for Indian-source rupee income even though it is the least tax-efficient.

Every NRO remittance above the threshold requires a chartered accountant's certificate in Form 15CB and an online declaration in Form 15CA before the bank will release funds, confirming that the tax due has been paid. FCNR(B) deposits, by contrast, are booked as term deposits for one to five years and repatriate freely on maturity without any 15CA or 15CB requirement, which makes them the cleanest vehicle for an NRI who wants to hold USD, GBP or EUR and avoid rupee exchange risk entirely.

A practical structuring rule follows from these limits. Rupee income earned in India (rent, dividends, pension) must flow into an NRO account and faces the 30% TDS and the USD 1 million cap; foreign earnings remitted to India belong in an NRE or FCNR(B) account, are tax-exempt under Sections 10(4)(ii) and 10(15)(iv)(fa), and repatriate without limit. You can estimate the after-tax position of each option with Oquilia's NRI income-tax calculator, model rent taxed in an NRO account with the NRI rental-income tax calculator, and size an NRO transfer against the annual ceiling with the NRI repatriation calculator.

For the underlying definitions, the DTAA glossary entry explains how treaty caps interact with Section 195, the TDS glossary entry sets out the 30% deduction mechanics, and the FEMA glossary entry covers the residence test that unlocks these accounts. Related reading includes our explainer on how NRIs repatriate up to USD 1 million a year from an NRO account and Section 115E and the flat 20% tax on NRI investment income.

FAQ

Is interest on an NRE account really tax-free in India?

Yes. Interest on a Non-Resident External account is exempt under Section 10(4)(ii) of the Income-tax Act, 1961 for as long as the holder is a person resident outside India under FEMA, 1999. Banks deduct no tax at source. The exemption ends the moment you return to India and become a resident, at which point the account must be redesignated within a reasonable period per the RBI FAQ of 16 January 2025.

Why is my NRO interest taxed at 30% when a resident pays less?

Because you are a non-resident, the bank deducts tax under Section 195 of the Income-tax Act, 1961 at a flat 30%, plus any surcharge and a 4% health and education cess, rather than applying resident slab rates. You can reduce this to the DTAA ceiling, 15% for a US or UK resident or 12.5% for a UAE resident, by filing a valid Tax Residency Certificate and Form 10F on the income-tax portal.

Can I hold US dollars in India without exchange risk?

Yes, through an FCNR(B) deposit. Interest is exempt under Section 10(15)(iv)(fa), the deposit is booked in a permitted foreign currency for a term of one to five years, and both principal and interest are fully repatriable on maturity without any Form 15CA or 15CB requirement, per the RBI FAQ of 16 January 2025.

How much can I send abroad from my NRO account each year?

Up to USD 1 million per financial year (1 April to 31 March), aggregated across all your NRO accounts, after all applicable Indian taxes are paid. Remittances require a Form 15CB certificate from a chartered accountant and an online Form 15CA declaration before the bank releases the funds.

Does the UAE tax my Indian NRO interest a second time?

No. The United Arab Emirates levies no personal income tax on individuals, so the 12.5% cap under the India-UAE DTAA (in force since 22 September 1993) is generally the only tax you pay on NRO interest, provided you furnish a UAE Tax Residency Certificate to claim the treaty rate.

Are capital gains on Indian shares exempt under my DTAA?

No. India retains a taxing right on capital gains at 12.5% under the USA, UK and UAE treaties; such gains are not exempt. The India-UAE treaty notes confirm that capital gains on shares of an Indian company remain taxable in India.

Do Bangladeshi or Pakistani nationals face extra rules?

Yes. Under the RBI FAQ of 16 January 2025, nationals of Bangladesh and Pakistan require prior approval from the Reserve Bank of India before opening an NRE, NRO or FCNR(B) account. Citizens of other countries who meet the person-of-Indian-origin conditions may open these accounts without case-by-case approval.