Borrowing rupees from an NRI or OCI relative: the new FEMA rule notified in February 2026

A resident Indian who wants to borrow rupees from a son in Dubai, a sister in London or a cousin in Toronto now works under a rewritten rule. On 9 February 2026 the Reserve Bank of India made the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 (Notification No. FEMA 3(R)(5)/2026-RB), published in the Official Gazette on 16 February 2026. The same day, RBI A.P. (DIR Series) Circular No. 22 (RBI/2025-26/221) told Authorised Dealer banks to follow the amended Regulations and deleted Para 2 of the Master Direction on Borrowing and Lending transactions in INR between residents and NRIs/PIOs, which had been the old route for rupee loans from NRIs to residents.

This guide sets out what the new Regulation 6(B)(vi) permits, the end-use bans in the new Regulation 3A, how interest is taxed in India and abroad, and how money returns to the lender, all from the 9 February 2026 notification text.

FEMA / DTAA Position

What the new Regulation 6(B)(vi) says

Paragraph 4 of the 2026 amendment substitutes sub-regulation (vi) of Regulation 6(B) of the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (Notification No. FEMA 3(R)/2018-RB of 17 December 2018). The new text reads: "A person resident in India being an individual may borrow in INR from an NRI or a relative who is an OCI cardholder for utilization in India", subject to two conditions.

Two drafting points matter. First, the "relative" condition attaches only to OCI cardholder lenders: on the plain wording, an NRI lender need not be a relative of the borrower. Second, the substituted text does not repeat the old 3-year tenor or the "Bank Rate + 2%" interest cap. Those limits sat in Para 2 of the Master Direction, which Circular No. 22 deleted on 16 February 2026, so neither should be quoted as current law.

Who counts as an NRI, an OCI cardholder and a relative

The amended Regulation 2 (paragraph 2 of the notification) defines each term by cross-reference:

Because "relative" now carries the Companies Act, 2013 meaning (Section 2(77) of that Act and the rules made under it), an OCI cardholder who falls outside that statutory list cannot lend under Regulation 6(B)(vi), even if the family treats them as close kin. An NRI lender faces no such test. If you are unsure whether your lender is an NRI for FEMA purposes, the FEMA glossary entry and the residential status explainer cover the basics.

The end-use bans in Regulation 3A

Paragraph 3 of the 2026 notification inserts Regulation 3A, which applies to "funds borrowed in terms of these Regulations". The borrowed rupees cannot be used in India for the purposes listed below.

The real-estate carve-out is the clause most families will care about. Regulation 2(1)(ab) defines "real estate business" as buying, selling or leasing land or property "with a view to earning profit", and item (v) of the exclusions expressly covers "commercial or residential properties for own use of the borrower". On that text, a resident who borrows from an NRI sibling to buy a flat to live in is not caught by Regulation 3A(1)(c), whereas borrowing to buy plots for resale is. Clause 3A(1)(g) similarly bars an individual from using the loan to buy securities.

Where the DTAA comes in

FEMA 1999 governs whether the loan is permitted; the Double Taxation Avoidance Agreement between India and the lender's country of residence governs how the interest is taxed. Under the interest article of each treaty, India as the source country may tax interest paid by an Indian resident, but only up to a treaty ceiling. The ceilings for six treaty partners are set out in the next section. See the DTAA glossary entry for how treaty relief is claimed.

Tax Treatment in India

The principal is not income

The loan principal is a debt, not a receipt of income, so neither the borrower nor the lender is taxed on the Rs 10 lakh (or any other sum) that moves when the loan is made or repaid. The tax questions arise only on the interest. A forgiven loan may be treated differently, so record the amount, rate and schedule in a written agreement from the first day.

Interest is Indian-source income of the lender

Interest paid by a resident individual to a non-resident lender on rupees used in India is income that arises in India. Since 1 April 2026 the Income-tax Act, 2025 has replaced the Income-tax Act, 1961 for tax years starting on or after that date, so pre-April 2026 years are governed by the 1961 Act and later years by the 2025 Act. Under Section 195 of the 1961 Act, a person paying a non-resident any sum chargeable to tax had to withhold tax, and the rule applied was the rate in the Act or the DTAA rate, whichever is lower. The 2025 Act carries the withholding obligation on payments to non-residents forward; borrowers should confirm the corresponding section number and current form with their bank or a chartered accountant before the first interest payment. See the TDS glossary entry.

Treaty ceilings on Indian tax on interest

To claim the treaty ceiling instead of the domestic rate, the lender generally needs a Tax Residency Certificate (TRC) from their country of residence for each year of the loan (see the TRC glossary entry). Oquilia's UAE treaty note records that a UAE TRC requires proof of establishment in the UAE, so a Dubai-based lender should obtain it before interest starts to accrue.

Worked example

Suppose a resident borrows Rs 10,00,000 from an NRI brother in the United Kingdom at an agreed 8% a year, interest paid annually to the brother's NRO account. Annual interest is Rs 80,000. If the UK lender supplies a valid TRC and the treaty ceiling of 15% applies, tax withheld in India would be at most Rs 12,000, leaving Rs 68,000 credited to the NRO account.

The 8% rate is illustrative; the 2026 text sets no interest cap. Whether the borrower can deduct the interest depends on what the money is used for under the borrower's own tax regime, not on FEMA. Lenders can model their total Indian liability with the NRI income tax calculator, and if the borrowed money funds a home the lender later lets, the rental income tax calculator is the companion tool.

Tax Treatment Abroad

The lender's country of residence will usually tax worldwide income, including interest received from India. Double taxation is relieved by foreign tax credit under each treaty: Oquilia's DTAA notes record that Article 24 of the India-US treaty gives a foreign tax credit in the country of residence, Article 23 of the India-Australia treaty uses the credit method so that both countries tax and the Indian tax is then offset, and Canada grants the credit through Section 126 of its Income Tax Act.

In practice the credit available abroad is normally limited to the Indian tax actually paid, up to the treaty ceiling. On the worked example above, a UK lender would hold evidence of Rs 12,000 withheld in India and claim it against UK tax on the Rs 80,000 of interest. The foreign tax credit calculator and the DTAA benefit calculator show how the two systems interact. Foreign tax rates themselves are a matter for the residence country's law.

Repatriation Mechanics

Money in

Condition (a) of Regulation 6(B)(vi) allows only two inflow routes: an inward remittance from outside India, or a debit to the lender's NRE, NRO, FCNR(B) or SNRR account. Cash handed over in India, or rupees paid from a third party's account, do not meet the text. Keep the bank advice for the remittance or the account debit, because it is the primary evidence that the loan was made under the 2026 Regulation.

Money out

Condition (b) of Regulation 6(B)(vi) is strict: the loan is on a non-repatriation basis, and "payment of interest and repayment of principal shall be made only to the NRO account of the lender." That holds even if the lender funded the loan from an NRE or FCNR(B) account, whose balances are normally freely repatriable. The moment the money is lent to a resident under this route, the return leg lands in NRO. Readers comparing account types can see the NRE account, NRO account and FCNR deposit glossary entries.

Getting the money abroad again

Once principal and interest are in the lender's NRO account, any onward transfer abroad is governed by the general NRO repatriation rules, not by the Borrowing and Lending Regulations. Oquilia's explainer on NRO repatriation and the USD 1 million limit covers that route, and the repatriation calculator estimates the cost.

FAQ

Can I borrow rupees from my NRI friend who is not a relative?

Yes, on the wording of Regulation 6(B)(vi) as substituted on 16 February 2026. The text allows a resident individual to borrow "from an NRI or a relative who is an OCI cardholder", so the relative test applies only to OCI cardholder lenders.

Is there still a 3-year minimum tenor or a Bank Rate + 2% interest cap?

Not in the current text. Both conditions sat in Para 2 of the Master Direction, which RBI Circular No. 22 of 16 February 2026 deleted, and the substituted Regulation 6(B)(vi) does not contain them. Parties should still record the tenor and rate in a written agreement.

Can I use the loan to buy a flat to live in?

Regulation 3A(1)(c) bars "real estate business", but Regulation 2(1)(ab)(v) excludes "commercial or residential properties for own use of the borrower" from that definition. A home bought for your own use is therefore outside the ban; buying property to resell at a profit is not.

Can I invest the borrowed money in shares or mutual funds?

No. Regulation 3A(1)(g) bars "transacting in listed/unlisted securities", with an exception only for strategic corporate actions by an Indian entity. A resident individual using the loan to buy securities would breach the end-use restriction.

Can my NRI lender take repayment into their NRE account?

No. Regulation 6(B)(vi)(b) requires payment of interest and repayment of principal "only to the NRO account of the lender", even if the loan was originally funded from an NRE or FCNR(B) account.

How much Indian tax is deducted from the interest?

The withholding rate is the domestic rate or the DTAA rate, whichever is lower, as Section 195 of the 1961 Act provided. Oquilia's DTAA table records a 15% interest ceiling for the US, UK, Canada, Singapore and Australia, and 12.5% for the UAE, subject to the lender supplying a valid Tax Residency Certificate.

Sources: RBI Notification No. FEMA 3(R)(5)/2026-RB dated 9 February 2026; RBI A.P. (DIR Series) Circular No. 22 (RBI/2025-26/221) dated 16 February 2026; Foreign Exchange Management Act, 1999 on India Code; RBI notification text; income-tax provisions at incometax.gov.in. This article explains the rules; it is not legal or tax advice.