How a Resident Indian Can Give an Interest-Free Loan to an NRI Relative Under FEMA

India's foreign-exchange law does permit a resident parent, sibling or child to lend rupees to a non-resident family member, but only inside a narrow corridor drawn by the Reserve Bank of India. The governing text is the RBI Master Direction on Borrowing and Lending in Indian Rupees between Residents and Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs), updated on 8 September 2026. Get one condition wrong and what looks like a routine family favour becomes an unauthorised capital-account transaction under the Foreign Exchange Management Act, 1999 (FEMA).

This guide sets out exactly what the Master Direction permits as of 6 October 2026, how the Income-tax Act, 1961 treats an interest-free family loan, what the borrower's country of residence may do with it, and the account mechanics that decide whether the money can ever travel back out of India. For the core concepts referenced throughout, see the Oquilia glossary entries on FEMA and the Liberalised Remittance Scheme.

FEMA / DTAA Position

Lending rupees to a person outside India is a capital-account transaction. Section 6 of FEMA, 1999 makes every capital-account transaction impermissible unless the RBI has specifically allowed it, so a resident cannot simply wire money to an NRI relative on handshake terms. The RBI Master Direction updated on 8 September 2026 is the specific permission, and it carves out a single, tightly fenced route for family lending.

Under that route a resident individual may lend to an NRI or PIO who is a close relative, but only if the loan satisfies four cumulative conditions. First, the loan must be interest-free: not a token 1% coupon, but genuinely zero. Second, it must carry a minimum maturity of one year. Third, the money must be routed only through formal banking channels, which also governs how it is later repaid (covered below). Fourth, the amount must fall within the resident lender's limit under the Liberalised Remittance Scheme, which the RBI sets at USD 250,000 per financial year per individual (Section 6 read with the LRS framework, rbi.org.in). A loan that breaches any one of these is not a defective family loan; it is a FEMA contravention from day one.

Two further points frame the corridor. "Relative" here is not a loose term: the lending route borrows the definition of relative in Section 2(77) of the Companies Act, 2013, which the Ministry of Corporate Affairs lists at mca.gov.in, so the borrower must be a spouse, parent, child, sibling or other listed family member rather than a cousin or friend. And the traffic now runs one way only. The reverse direction, under which a non-resident could lend rupees to a resident, was withdrawn by an RBI circular dated 16 February 2026, so an NRI child can no longer formally lend to a resident parent under this facility. The table below distils the live conditions.

A Double Taxation Avoidance Agreement does not change any of this. A DTAA allocates taxing rights over income; an interest-free loan generates no income, so no treaty article is engaged at the FEMA stage. The treaty becomes relevant only if the arrangement is mischaracterised, which is why the documentation discussed below matters.

Tax Treatment in India

The defining feature of this facility for Indian tax is also the simplest: because the loan is interest-free, it produces no interest income in anyone's hands. With no interest paid to a non-resident, Section 195 of the Income-tax Act, 1961 (the withholding provision for payments to non-residents) has nothing to bite on, so there is no TDS to deduct, no 30% plus surcharge and 4% health and education cess to gross up, and no Form 15CA/15CB certification triggered by an outbound interest payment (incometax.gov.in). The resident lender reports the remittance under the LRS, but the principal itself is not income and attracts no tax.

The next question families ask is whether the Assessing Officer can treat the advance as a disguised gift and tax it. For a genuine, documented, repayable loan the answer is no, because a loan is not a transfer without consideration. Even in the worst case, the point is largely academic between relatives: Section 56(2)(x) of the Income-tax Act, 1961 expressly exempts any sum received from a "relative", so a transfer between the family members contemplated here would fall outside the charge in any event (incometax.gov.in). The practical risk is not tax on the principal but the loan being recharacterised for want of paper, which is why a dated loan agreement recording the zero interest rate and the one-year-plus tenor is essential.

Mode of transaction is the one place the Income-tax Act imposes a hard numeric limit. Section 269SS bars accepting a loan or deposit of Rs 20,000 or more otherwise than by account-payee cheque, bank draft or electronic transfer, and Section 269T mirrors this for repayment; breach invites a penalty equal to the amount under Section 271D or 271E (indiacode.nic.in). Since the FEMA route already demands banking channels, a family that stays on the rails for RBI purposes automatically satisfies the Income-tax Act's mode-of-transaction rules. You can model the borrower's wider Indian tax position, including any rental or interest income from other sources, with the NRI income-tax calculator.

Tax Treatment Abroad

Because the loan carries no interest, there is typically no income event in the borrower's country of residence either, so the foreign-tax-credit machinery does not come into play. A credit under a DTAA or under domestic foreign-tax-credit rules exists to relieve tax paid twice on the same income; where no income arises and no Indian tax is levied, as is the case here from the 8 September 2026 Master Direction route, there is simply nothing to credit. You can see how the credit logic works on genuinely taxed income using the foreign tax credit calculator and the glossary note on DTAA.

Two cross-border traps deserve naming rather than hand-waving. First, several jurisdictions apply below-market or imputed-interest rules that can treat a zero-interest loan as if interest had been charged, creating a notional income or gift consequence for the lender or borrower regardless of what the Indian paperwork says; the United States and the United Kingdom both operate versions of this concept. Second, large inbound transfers from a non-resident often trigger information-reporting obligations in the destination country even when no tax is due, and failure to file those returns can carry penalties disconnected from the tax itself. These are host-country matters that the Indian Master Direction updated on 8 September 2026 does not address, so an NRI borrower in the United States, the United Kingdom or the UAE should confirm the local treatment before drawing down the funds.

The governing principle for the India side remains that an interest-free loan is a balance-sheet item, not an income item. That is precisely why the DTAA position stated above holds: a treaty cannot exempt income that was never earned, and it cannot be invoked to wash a transaction that India never taxed in the first place (indiacode.nic.in).

Repatriation Mechanics

Whether the family can ever move the money back out of India is governed entirely by how the loan is repaid, and the Master Direction updated on 8 September 2026 is explicit on this. Repayment must come either as a fresh inward remittance from outside India through normal banking channels, or by debit to the NRI borrower's NRO, NRE or FCNR(B) account. The choice of account is not cosmetic; it decides repatriability.

An NRE account holds income earned abroad and converted to rupees, and both principal and interest are freely repatriable, so a repayment debited from an NRE balance can leave India without a separate approval. An FCNR(B) deposit is maintained in foreign currency and is likewise fully repatriable. An NRO account holds India-sourced income and is only conditionally repatriable: the RBI permits remittance of up to USD 1 million per financial year out of NRO balances, subject to tax clearance via Form 15CA/15CB (rbi.org.in; incometax.gov.in). Because the one-year-plus loan may be repaid years after it is advanced, the account the borrower chooses at repayment time determines whether the returning rupees are stuck or free.

Costs matter too. Even a fully repatriable repayment incurs currency-conversion spreads and wire charges that a family rarely budgets for, and on a sum near the USD 250,000 LRS ceiling those spreads can run into lakhs over the loan's life. Estimate them before you commit using the remittance cost calculator, and model the outbound NRO position with the repatriation calculator. The disciplined sequence is: document the interest-free loan with a one-year-plus maturity, remit within the lender's USD 250,000 LRS limit, keep every leg on banking channels to satisfy Sections 269SS and 269T, and repay into an account whose repatriability matches the family's eventual plans.

FAQ

Can a resident Indian charge even a nominal interest on a loan to an NRI relative?

No. The RBI Master Direction updated on 8 September 2026 permits the resident-to-NRI rupee loan route only where the loan is strictly interest-free. Charging even 1% takes the arrangement outside the permitted corridor and turns it into a capital-account transaction that Section 6 of FEMA, 1999 does not allow without separate RBI approval (rbi.org.in).

How much can a resident lend to an NRI relative in a year?

The loan must sit within the lender's Liberalised Remittance Scheme allowance, which the RBI fixes at USD 250,000 per individual per financial year (rbi.org.in). That ceiling is shared with the lender's other LRS usage, such as overseas investment or travel, so a resident who has already remitted under LRS in the same financial year has correspondingly less headroom to lend.

What is the minimum tenure of the loan?

The Master Direction updated on 8 September 2026 requires a minimum maturity of one year. A loan structured to be repaid within months does not qualify, so the loan agreement should record a maturity of at least 12 months to stay inside the permitted route (rbi.org.in).

Can an NRI lend rupees to a resident relative instead?

Not under this facility any longer. The reverse direction was withdrawn by an RBI circular dated 16 February 2026, so a non-resident can no longer formally lend rupees to a resident relative under this route (rbi.org.in). Families who had planned to lend in that direction should take specific advice rather than assume the old position still applies.

Will the NRI relative pay income tax in India on the loan received?

No. A genuine, documented loan is not income, and in any case Section 56(2)(x) of the Income-tax Act, 1961 exempts any sum received from a "relative", so the principal is outside the charge (incometax.gov.in). Because the loan is interest-free there is also no interest income, hence no TDS under Section 195.

How should the loan be repaid so the money can be sent back abroad?

Repayment must be a fresh inward remittance from outside India or a debit to the borrower's NRO, NRE or FCNR(B) account. NRE and FCNR(B) balances are fully repatriable, while NRO repayment is capped at USD 1 million per financial year and needs Form 15CA/15CB tax clearance (rbi.org.in; incometax.gov.in).

Does a DTAA exempt the loan from tax?

No, and the question is misframed. A DTAA allocates taxing rights over income, but an interest-free loan generates no income, so no treaty article is engaged and there is nothing to exempt or credit (indiacode.nic.in). A DTAA becomes relevant only if the borrower later earns taxable income, such as interest or capital gains, from separate dealings.