NRE vs NRO vs FCNR(B): how the three NRI bank accounts differ on currency, repatriation and tax

When an Indian passport-holder or person of Indian origin moves abroad, the first practical question is rarely about tax planning; it is about where the rupee salary transfers, the flat rent in Pune and the maturing life-insurance proceeds should actually land. The Reserve Bank of India answers this in its FAQ "Accounts in India by Non-residents", updated as on 16 January 2025, which recognises exactly three rupee-or-foreign-currency vehicles a Non-Resident Indian may hold: the Non-Resident External (NRE) account, the Non-Resident Ordinary (NRO) account, and the Foreign Currency Non-Resident (Bank) or FCNR(B) deposit. Choosing wrongly between them can cost an NRI up to 30% in avoidable withholding tax on interest, or trap funds behind a USD 1 million annual repatriation ceiling, so the distinction is worth understanding before the account-opening form is signed.

FEMA / DTAA Position

Residential status under the Foreign Exchange Management Act, 1999 (FEMA) is the gatekeeper. Section 2(w) of FEMA defines a "person resident outside India" as anyone who is not resident in India, and the RBI FAQ of 16 January 2025 confirms that an NRI is a person resident outside India who is either a citizen of India or a person of Indian origin. This FEMA test is separate from the 182-day physical-presence test in Section 6 of the Income-tax Act, 1961; a person can be a non-resident under FEMA from the day they leave for employment abroad, which is precisely when NRE and FCNR(B) accounts become available to them.

Section 6 of FEMA, 1999 governs capital-account transactions and holds that a resident needs RBI permission to undertake them unless specifically permitted, with the Liberalised Remittance Scheme carving out a standing USD 250,000 per financial year window. The mirror-image relevance for NRIs is that the NRE and FCNR(B) accounts are, by RBI design, freely repatriable so that money brought in from abroad can leave again without any capital-account hurdle. The Double Taxation Avoidance Agreement then decides how the interest these accounts generate is split between India and the country of residence, and under Section 90 of the Income-tax Act, 1961 an NRI must hold a valid Tax Residency Certificate plus Form 10F before any lower treaty rate can be claimed.

It is important to state the DTAA position on interest precisely, because treaty rates are not "exempt". India retains a taxing right on NRO interest and levies a 12.5% rate on long-term capital gains sourced in India across every major treaty. The following table sets out the treaty interest ceilings that a valid TRC unlocks for the most common NRI corridors.

Tax Treatment in India

The single most valuable feature of the NRE account is that its interest is fully exempt from Indian income tax under Section 10(4)(ii) of the Income-tax Act, 1961, provided the account holder remains a person resident outside India under FEMA. FCNR(B) deposits enjoy a parallel exemption under Section 10(15)(iv)(fa) of the same Act, which shields interest paid by a scheduled bank on foreign-currency deposits held by a non-resident. In both cases the bank deducts no tax at source, so an NRI earning 6.75% to 7.25% on a one-year NRE fixed deposit keeps the full coupon.

The NRO account is the taxable cousin. It is designed for India-sourced rupee income such as rent, dividend and pension, and its interest is fully taxable in India. Under Section 195 of the Income-tax Act, 1961, the bank must deduct TDS on NRO interest at 30% plus applicable surcharge and 4% health and education cess, giving an effective 31.2% deduction before any surcharge; that is the highest slab rate applied at source regardless of the depositor's actual total income. Section 195 itself provides that withholding may instead follow the DTAA rate where it is lower, so a US-resident NRI with a TRC can bring the NRO interest deduction down from 31.2% to the treaty ceiling of 15%.

Surcharge stacks on top for larger balances: 10% of tax for 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, capped at 25% in the new tax regime rather than the older 37% peak. Rent credited to an NRO account is separately liable to TDS at 30% under Section 195, which is why NRI landlords often end the year with a refund position and should model their liability on our NRI rental income tax calculator before filing. The table below distils the three accounts to the features that actually move money.

Because the NRO interest is taxable while the NRE interest is not, many returning or newly-emigrating NRIs run both accounts and use our NRI income tax calculator to project the blended withholding across the two before the financial year closes on 31 March.

Tax Treatment Abroad

Indian tax exemption does not automatically survive the border. Interest that Section 10(4)(ii) treats as exempt inside India is generally still taxable income in the country of residence, because most tax systems tax their residents on worldwide income. A US-resident NRI, for example, must report NRE and FCNR(B) interest on their Form 1040 even though the Indian bank withheld nothing, and the Internal Revenue Service treats the foreign-currency movement on an FCNR(B) deposit as a potential Section 988 gain or loss when the deposit matures.

Where India has taxed the income, the DTAA prevents the same rupee being taxed twice. Article 24 of the India-United States treaty of 12 September 1991 and the equivalent relief in the India-Canada treaty of 6 May 1997 both allow a foreign tax credit in the country of residence for tax already paid in India. So an NRO depositor who suffered 15% Indian withholding under the treaty can typically offset that against their home-country liability, with our foreign tax credit calculator illustrating the mechanics. The credit is not automatic; the resident must ordinarily attach evidence of the Indian TDS, which is why retaining the Form 16A issued by the Indian bank matters.

For UAE-resident NRIs the calculus differs because the emirates levy no personal income tax as of July 2026, so the 12.5% DTAA interest ceiling under the India-UAE treaty of 22 September 1993 effectively becomes the only tax on NRO interest. That treaty note is specific: claiming the reduced rate requires a UAE Tax Residency Certificate supported by proof of a UAE establishment, a documentary bar the RBI-linked source flags explicitly. NRE and FCNR(B) interest, being untaxed in both India and the UAE, then flows to the depositor gross, which is a large part of why FCNR(B) balances from the Gulf corridor swelled during the rupee's slide past 85 to the US dollar.

Repatriation Mechanics

Repatriation is where the three accounts diverge most sharply. Balances in an NRE account, both principal and interest, are freely repatriable without any monetary ceiling, and the same is true of FCNR(B) deposits, which the RBI FAQ of 16 January 2025 confirms are fully repatriable in the currency of deposit. This is the structural reason an NRI who may need to move money back out should route foreign earnings into NRE or FCNR(B) rather than NRO in the first place.

The NRO account carries a hard limit: the RBI permits repatriation of NRO balances only up to USD 1 million per financial year, inclusive of sale proceeds of assets and after payment of applicable Indian taxes. Crossing funds from NRO to NRE to escape the cap is permitted but is itself counted within that USD 1 million ceiling, and it requires the depositor to file Form 15CA together with a chartered accountant's Form 15CB certifying that taxes have been discharged. Our NRO to NRE repatriation calculator models the tax-and-ceiling interaction for a given transfer amount, and the underlying rule sits within the FEMA framework where, under Section 6, capital-account movements need either general or specific RBI permission.

One frequent confusion is between the NRO USD 1 million cap and the Liberalised Remittance Scheme USD 250,000 limit; they are unrelated. LRS is a resident-Indian outward-remittance facility under Section 6 of FEMA, 1999, whereas the USD 1 million NRO window is a non-resident inward-to-outward repatriation allowance. An NRI selling inherited property in India in FY 2025-26 uses the USD 1 million NRO route, not LRS, and must ensure the buyer has deducted TDS correctly under Section 195 before the net proceeds can be repatriated.

FAQ

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

No. Once an NRI becomes a resident under FEMA, the RBI FAQ of 16 January 2025 requires the NRE account to be redesignated as a resident rupee account, or the balances transferred to a Resident Foreign Currency (RFC) account. The Section 10(4)(ii) interest exemption also stops from the date residential status changes, because that exemption is available only to a person resident outside India.

Is FCNR(B) interest really tax-free even though it is a foreign-currency deposit?

Yes, in India. Interest on FCNR(B) deposits is exempt under Section 10(15)(iv)(fa) of the Income-tax Act, 1961 as long as the depositor is a non-resident, so the Indian bank deducts no TDS. The interest may still be taxable in the country of residence, and the currency in which it is held means the bank, not the depositor, absorbs the rupee exchange-rate risk on both principal and interest.

What TDS rate applies to my NRO fixed deposit interest?

The domestic rate under Section 195 of the Income-tax Act, 1961 is 30% plus surcharge and 4% cess, an effective 31.2% before surcharge. If you furnish a valid Tax Residency Certificate and Form 10F, the bank can apply the lower DTAA rate instead, which is 15% for residents of the United States, the United Kingdom and Canada, and 12.5% for UAE residents.

How much can I repatriate from my NRO account each year?

Up to USD 1 million per financial year, inclusive of sale proceeds of assets, after Indian taxes are paid, per RBI rules. The transfer requires Form 15CA and a chartered accountant's Form 15CB. This ceiling is entirely separate from the resident LRS limit of USD 250,000 per year under Section 6 of FEMA, 1999.

Can NRE and NRO accounts be held jointly?

An NRE account may be held jointly with another NRI, or with a resident close relative on a "former or survivor" basis, per the RBI FAQ of 16 January 2025. An NRO account may be held jointly with residents or other non-residents. The tax treatment does not change with joint holding: NRE interest stays exempt under Section 10(4)(ii) and NRO interest stays taxable under Section 195.

Does the DTAA make my NRO interest completely exempt?

No, and any adviser claiming so is wrong. India retains the right to tax NRO interest; the DTAA only caps the rate, typically at 15% for US, UK and Canadian residents and 12.5% for UAE residents. The treaty then lets you claim a foreign tax credit at home for the Indian tax paid, under Article 24 of the relevant treaty, so the same income is not taxed twice.

Should I keep my Indian salary savings in NRE or NRO?

Foreign earnings should go into NRE, because the interest is exempt under Section 10(4)(ii) and the balance is fully repatriable without the USD 1 million cap. Reserve the NRO account for genuinely India-sourced rupee income such as rent, dividend and pension, which legally cannot be credited to an NRE account under the RBI FAQ of 16 January 2025.