FEMA Notification 5(R) NRO vs NRE vs FCNR: Choosing The Right Deposit For An NRI

For an Indian who has moved abroad, the first banking decision after acquiring non-resident status under FEMA is rarely glamorous, but it is decisive: which deposit account should hold the money? The choice between an NRO, an NRE and an FCNR(B) account is governed by a single instrument, the Reserve Bank of India's FEMA Notification No. 5(R), and the wrong pick can quietly cost an NRI 30 per cent or more in avoidable Indian tax on interest, or trap funds behind repatriation limits. This guide walks through the statutory position, the Indian tax treatment, the foreign-tax-credit interaction and the repatriation mechanics, using only the rates currently in force for FY 2025-26.

The three accounts look similar on a bank's tariff sheet, but they are built for different money. NRO is for income that arises in India; NRE is for income that arises abroad and is then sent home; FCNR(B) lets an NRI hold a term deposit in foreign currency so that the rupee never enters the equation. Understanding which bucket your money belongs in is the difference between tax-free, fully repatriable interest and interest taxed at the maximum marginal rate.

FEMA / DTAA Position

The Foreign Exchange Management (Deposit) Regulations, consolidated by the RBI as FEMA Notification No. 5(R), is the master instrument that authorises banks to accept deposits from persons resident outside India. It defines and ring-fences three account classes. The Non-Resident (Ordinary) account, or NRO, is a rupee account meant for income that has an Indian source: rent, dividends, pension or the sale proceeds of Indian assets. The Non-Resident (External) account, or NRE, is a rupee account that may be funded only from foreign-source earnings remitted into India. The Foreign Currency Non-Resident (Bank) account, or FCNR(B), is a term deposit held in a permitted foreign currency for a fixed tenor of one to five years, insulating the holder from rupee depreciation.

Eligibility flows from residential status, not citizenship. Once a person becomes a non-resident under FEMA, any existing resident savings account must be redesignated as NRO; it cannot simply continue. FEMA's wider architecture matters here too. Under Section 6 of FEMA 1999, capital-account transactions require RBI permission unless specifically permitted, and the Liberalised Remittance Scheme caps a resident individual's outward remittances at USD 250,000 per financial year. The deposit regulations sit inside this framework, which is why the repatriation limits differ so sharply between NRO and NRE accounts.

On the treaty side, a Double Taxation Avoidance Agreement (DTAA) does not change which account an NRI opens, but it caps the Indian tax India may levy on the interest those accounts generate. India has retained the right to tax interest sourced in India even under its treaties: the India-USA treaty (effective 12 September 1991) sets the interest ceiling at 15 per cent, the India-UK treaty (effective 26 October 1993) also at 15 per cent, and the India-UAE treaty (effective 22 September 1993) at 12.5 per cent. These ceilings become relevant the moment an NRO account starts paying interest, as the next section explains.

Tax Treatment in India

The single biggest fork in the road is how the Income Tax Act 1961 treats the interest each account earns. Interest credited to an NRE account is exempt from Indian income tax under Section 10(4)(ii), and that exemption holds for as long as the account holder qualifies as a person resident outside India under FEMA. Interest on an FCNR(B) deposit is likewise exempt while the depositor remains a non-resident, which is what makes these two accounts so attractive for foreign-source money. The exemption is statutory, not discretionary, so banks pay NRE and FCNR(B) interest without deducting any tax at source.

NRO interest is the opposite. Because it represents Indian-source income, it is fully taxable, and Section 195 of the Income Tax Act requires the bank to deduct tax at source before crediting the interest. The withholding rate on NRO interest is 30 per cent, on top of which the Finance Act applies the surcharge slabs and a 4 per cent health and education cess. For FY 2025-26 the surcharge runs at 10 per cent on income above Rs 50 lakh, 15 per cent above Rs 1 crore, and is capped at 25 per cent above Rs 2 crore. At the very top, the effective TDS works out to roughly 39 per cent (30 per cent base, grossed up by a 25 per cent surcharge and 4 per cent cess), which is why high-balance NRO holders should never leave the deduction on autopilot.

This is where the DTAA earns its keep. By furnishing a valid Tax Residency Certificate from the country of residence together with Form 10F, an NRI can have the bank deduct TDS at the lower treaty rate instead of the domestic 30 per cent. A US-resident or UK-resident NRI can cap NRO-interest TDS at 15 per cent, and a UAE-resident NRI at 12.5 per cent. The table below sets out the relevant ceilings; note that the same treaties do not make capital gains exempt — India retains the right to tax long-term capital gains at 12.5 per cent, so a UAE depositor selling shares of an Indian company is still taxable in India.

A practical point on filing: even where TDS has been deducted, an NRI whose total Indian income is modest may be entitled to a refund. The basic exemption and the Section 87A rebate (Rs 60,000 in the new regime for total income up to Rs 12 lakh in FY 2025-26) can wipe out the liability, but the only route to recover excess TDS is to file a return. Our NRI income tax calculator can estimate the residual liability after treaty relief, and the NRI rental income tax calculator handles the common case of an NRO account fed by Indian rent.

Tax Treatment Abroad

The exemption an NRI enjoys in India is purely an Indian-law concept, and it does not travel. Most NRIs live in countries that tax residents on their worldwide income, which means NRE and FCNR(B) interest that is tax-free in India under Section 10(4)(ii) may still be fully taxable in the country of residence. A US-resident NRI, for instance, must report NRE-account interest on a US return as ordinary income even though India levied nothing on it; the India exemption does not create a US exemption. The treaty's purpose is to prevent the same income being taxed twice at full rates, not to deliver a global zero.

Where India does tax income — typically NRO interest, rent, or capital gains — the mechanism that prevents double taxation is the foreign tax credit. Under Article 24 of the India-USA treaty, the United States allows a credit for Indian tax paid against the US liability on the same income; the India-UK and India-UAE treaties carry equivalent relief articles. So an NRO depositor who suffers 15 per cent Indian TDS on interest under the treaty cap can generally claim that 15 per cent as a credit at home, leaving only the top-up to the higher domestic rate, if any, payable abroad. The credit is claimed in the country of residence, not in India.

Documentation is the gate. To access any treaty rate an NRI needs a current Tax Residency Certificate, and for UAE residents the RBI and tax authorities specifically look for proof of a UAE establishment behind the TRC, given that the UAE has historically levied no personal income tax. The credit claimed abroad must be supported by the Indian TDS certificate (Form 16A) and, where relevant, the filed Indian return. For a fuller treatment of how the credit mechanism works across treaties, see the DTAA glossary entry and the TDS glossary entry.

Repatriation Mechanics

Repatriability is the second axis on which these accounts diverge, and it is governed entirely by FEMA Notification 5(R) rather than by tax law. NRE and FCNR(B) balances are fully and freely repatriable — both principal and interest can be sent abroad without any ceiling and without seeking RBI approval, precisely because the money originated abroad. This is the structural reason an NRI should route foreign earnings into NRE or FCNR(B) rather than letting them land in an NRO account.

NRO funds are repatriable too, but within a cap. An NRI may remit up to USD 1 million per financial year out of NRO balances, covering current income as well as the sale proceeds of Indian assets, after meeting the tax obligations on that money. The USD 1 million window is per financial year and resets each year, so large repatriations may need to be staged across two financial years. Funds may also move from an NRO account to an NRE account within this same USD 1 million annual limit, which is a useful planning step once Indian tax has been settled.

The compliance hinge for any NRO repatriation is the Form 15CA/15CB pair. Form 15CB is a certificate from a chartered accountant confirming the nature of the remittance and that the correct tax has been deducted, and Form 15CA is the declaration filed with the income-tax department before the bank releases the funds abroad. Without this pair, an authorised dealer bank will not process an NRO outward remittance. By contrast, NRE and FCNR(B) remittances do not require the 15CA/15CB route for the principal, since that money was never subject to Indian tax in the first place. The NRI repatriation calculator helps map a remittance against the USD 1 million ceiling and the documents required.

Putting it together, the deposit choice almost writes itself once you classify the money. Foreign salary, overseas business income or any funds remitted from abroad belong in an NRE account if you want rupee returns, or in an FCNR(B) deposit if you want to avoid rupee-exchange risk over a one-to-five-year horizon — both are tax-free in India and fully repatriable. Indian rent, dividends and asset-sale proceeds have no choice: they must sit in an NRO account, where the priority shifts to capping TDS through a treaty rate and reclaiming any excess via a return. For a side-by-side of the rupee accounts, the NRE-versus-NRO glossary entry is a useful primer.

FAQ

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

Yes. Interest credited to an NRE account is exempt under Section 10(4)(ii) of the Income Tax Act 1961, and banks pay it without any TDS, for as long as the account holder is a person resident outside India under FEMA. The exemption ends when residential status changes, so the account should be redesignated promptly on a permanent return to India.

How much TDS does an NRO account attract?

Section 195 requires TDS on NRO interest at 30 per cent, plus the applicable surcharge (10 per cent above Rs 50 lakh, 15 per cent above Rs 1 crore, capped at 25 per cent above Rs 2 crore for FY 2025-26) and a 4 per cent cess — an effective peak of roughly 39 per cent. Furnishing a Tax Residency Certificate and Form 10F lets the bank apply the lower treaty rate instead, such as 15 per cent for US and UK residents.

Can I repatriate the full balance of my NRO account?

NRO balances are repatriable up to USD 1 million per financial year after tax, supported by Form 15CA and a chartered accountant's Form 15CB. NRE and FCNR(B) balances, by contrast, are fully repatriable with no ceiling because they hold foreign-source money.

Are capital gains exempt under the DTAA?

No. India retains the right to tax long-term capital gains at 12.5 per cent even where a treaty applies, and the India-UAE treaty expressly keeps capital gains on shares of an Indian company taxable in India. A DTAA caps Indian tax on interest and dividends; it does not make Indian capital gains exempt.

Does my country of residence tax my tax-free Indian interest?

Often, yes. The Section 10(4)(ii) exemption is an Indian provision only. A US-resident NRI must still report NRE interest as taxable income in the United States, because the US taxes worldwide income; the treaty prevents double taxation through a foreign tax credit under Article 24, not by exempting the income abroad.

Which account avoids rupee-exchange risk?

An FCNR(B) deposit, because it is held in a permitted foreign currency for a fixed one-to-five-year tenor under FEMA Notification 5(R). The principal and interest are returned in the same foreign currency, so a fall in the rupee does not erode the deposit's value, and the interest remains tax-free in India while you are non-resident.

What funds can I put into an NRE account?

Only foreign-source funds — overseas salary, business income or remittances from abroad — may be credited to an NRE account under FEMA Notification 5(R). Indian-source income such as rent or dividends cannot go into an NRE account; it must be routed through an NRO account, which is taxable in India and repatriable only within the USD 1 million annual limit.