Lending to an NRI Relative: The FEMA Conditions on Interest-Free Rupee Loans Within the LRS Limit

Few money conversations are more delicate than a relative abroad asking for a soft loan to bridge a property deposit, a medical bill or a business gap back home. The instinct is to wire the funds and settle terms over a phone call. Under Indian exchange-control law that instinct can quietly breach a statute, because a rupee loan from a resident individual to a Non-Resident Indian (NRI) or Person of Indian Origin (PIO) is a capital-account transaction governed by the Reserve Bank of India's Master Direction No. 6/2015-16 on Borrowing and Lending, first issued on 1 January 2016 and most recently updated on 16 February 2026.

The good news is that the route is explicitly permitted, not merely tolerated. A resident may lend in rupees to an NRI or PIO relative provided four conditions are met simultaneously: the loan is free of interest, it carries a minimum maturity of one year, it sits within the lender's overall Liberalised Remittance Scheme (LRS) ceiling of USD 250,000 per financial year, and it is disbursed by crossed cheque or electronic transfer into the borrower's NRO account. Miss any one of those and the transaction stops being a "permitted" capital-account dealing and becomes a contravention under Section 6 of the Foreign Exchange Management Act, 1999. This guide walks through the statute, the tax it does and does not attract on both sides of the border, and how the money moves back out.

FEMA / DTAA Position

The lending power is not a general one. It flows from the resident-individual lending provision inside RBI Master Direction No. 6/2015-16, which permits a rupee loan only to a "relative" as that term is defined in Section 2(77) of the Companies Act, 2013. That definition is narrow: it covers spouse, and members of a Hindu Undivided Family, plus a closed list of relations such as parents, children, siblings and their specified connections. A cousin, a nephew-in-law or a close friend does not qualify, and a loan to them on these terms would fall outside the permission and require separate RBI approval.

Four cumulative conditions define the corridor. The table below distils what the Master Direction (read with the LRS framework set out in our explainer on the LRS window) requires for the loan to be compliant from rupee one.

Two structural points deserve emphasis. First, the loan must be drawn against, and counted within, the lender's LRS headroom; if the resident has already remitted USD 200,000 abroad in the same financial year for, say, an overseas equity portfolio, only USD 50,000 of lending room remains until the LRS clock resets on 1 April. The interaction between LRS usage and family lending is precisely why the repatriation calculator is worth running before any transfer leaves the account. Second, the asymmetry introduced on 16 February 2026 matters: the reverse provision, which had allowed a resident individual to borrow in rupees from an NRI relative, was deleted by A.P. (DIR Series) Circular No. 22 of that date. The lending door remains open; the borrowing-from-NRI door, for residents, has been closed.

There is no Double Taxation Avoidance Agreement (DTAA) angle to the loan principal itself, because a genuine repayable loan transfers no income across the border and therefore creates nothing for a treaty to allocate. The DTAA only becomes relevant once the parked rupees start earning, a point developed in the foreign-tax section below.

Tax Treatment in India

The single most common worry is misplaced: an interest-free loan to a relative does not generate taxable income for either party in India. The principal is a repayable obligation, not a gift, so it never enters the borrower's income computation. Because the lender charges no interest, there is no actual interest receipt to tax in the resident's hands either, and Indian law does not impose notional interest on a bona fide non-business loan between individuals. Compared with a commercial loan, where interest would be taxable and would attract TDS, the interest-free family route is deliberately tax-neutral on the loan leg.

A loan also sidesteps the gift-taxation machinery of Section 56 of the Income-tax Act, 1961. Even if the arrangement were recharacterised as a gift, transfers from a "relative" are fully exempt under that section regardless of amount, which is one reason the relative test recurs across both the FEMA and tax codes. The practical lesson is documentary: a dated loan agreement specifying the interest-free term, the minimum one-year maturity, and the NRO credit instruction is what distinguishes a loan from a gift if the file is ever examined by an assessing officer.

Tax does, however, attach the moment the borrowed rupees are deployed. If the NRI relative places the funds in an NRO term deposit, the interest is Indian-source income, taxable in India and subject to withholding under Section 195 at the applicable domestic rate before any treaty relief. If the funds buy a let-out flat, the rental yield is taxable here too, which our NRI rental income tax calculator models slab by slab. High earners should also note the surcharge ladder that rides on top of base tax.

The top surcharge in the new regime is capped at 25%, not the older 37% that still applies only in the old regime above Rs 5 crore, and a 4% health and education cess applies on tax plus surcharge in every band. An NRI estimating the eventual liability on income earned from the loaned corpus can sanity-check the slab maths with the NRI tax calculator.

Tax Treatment Abroad

The loan principal is not income in the NRI's country of residence either, so for the transfer itself there is nothing to declare and no foreign tax to credit. The DTAA machinery engages only on the downstream earnings, and here the treaty caps can materially reduce the Indian withholding the NRI suffers, provided a valid Tax Residency Certificate is furnished.

Consider the two largest NRI corridors. Under the India-United States treaty, effective from 12 September 1991, Article 24 confirms that a foreign tax credit for Indian tax paid is available in the country of residence, and the treaty caps Indian withholding on interest at 15%. Under the India-United Arab Emirates treaty, effective from 22 September 1993, the interest withholding cap is 12.5%, and because the UAE levies no personal income tax, the NRI has no residence-country liability against which to claim a credit; the DTAA cap simply lowers the Indian deduction at source.

The credit mechanism only neutralises double taxation up to the residence country's own rate on that income; where India's treaty-capped rate exceeds the foreign liability, the excess is not refunded abroad. This is why structuring the deployment of the loaned funds, rather than the loan, is where the real tax planning sits. A US-resident relative parking the corpus in an interest-bearing deposit must weigh the 15% Indian cap against the US marginal rate on the same interest before claiming the foreign tax credit.

Repatriation Mechanics

The Master Direction is deliberate about where the loan lands: the borrower's NRO account, credited only by crossed cheque or electronic transfer, never by cash. That single routing rule shapes everything about how the money can later leave India, because the NRO account is the restricted bucket of the three NRI account types.

Funds in an NRE account or an FCNR(B) deposit are freely and fully repatriable, but the loaned rupees are not permitted to enter those accounts directly; the Master Direction confines them to NRO. Repatriation out of NRO is governed by the RBI's remittance-of-assets framework, which permits an NRI to remit up to USD 1 million per financial year from NRO balances, net of applicable taxes, on production of Forms 15CA and 15CB certifying that the tax position has been cleared. Within that ceiling the NRI can move the loan corpus, or its earnings, back to the country of residence.

When the relative repays the loan, the flow reverses cleanly. Repayment may be made from the NRI's own NRO balances, by fresh inward remittance from abroad, or out of funds held in an FCNR(B) or NRE account, since the resident lender is simply receiving back rupees in India. There is no LRS consumption on the repayment leg, because the resident is being repaid, not remitting afresh. Running the figures through the repatriation calculator before each transfer keeps both the USD 1 million NRO ceiling and the lender's LRS headroom in view.

A closing word on documentation, since FEMA enforcement is paperwork-driven. Retain the loan agreement, the bank advice showing the crossed-cheque or electronic credit to the NRO account, evidence that the tenure was at least one year, and the Form 15CA/15CB pair for any repatriation. With that file intact, an interest-free family loan is one of the cleaner cross-border arrangements Indian law allows. Without it, even a genuine loan can be mistaken for an unreported remittance.

FAQ

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

No. RBI Master Direction No. 6/2015-16 requires the loan to be free of interest. Charging even a token rate removes the transaction from the permitted category, leaving it a contravention under Section 6 of FEMA, 1999 unless prior RBI approval is obtained.

How much can a resident lend under this route?

The loan counts within the lender's overall LRS ceiling of USD 250,000 per financial year. If part of that allowance has already been used for other remittances since 1 April, only the unused balance is available to lend until the limit resets the next financial year.

Which account must the loan be credited to?

The borrower's NRO account, and only by crossed cheque or electronic transfer. Cash disbursement is not permitted, and the funds cannot be credited directly to an NRE or FCNR(B) account under this provision.

Is the interest-free loan taxable for the NRI relative?

No. The principal is a repayable obligation, not income, so it does not enter the borrower's income computation. Tax arises only on what the funds subsequently earn, such as NRO deposit interest taxed under Section 195 or rental income at slab rates.

Can the NRI repatriate the loaned rupees abroad?

Yes, but through the NRO route. Up to USD 1 million per financial year can be remitted from NRO balances under the RBI remittance-of-assets framework, net of tax and supported by Forms 15CA and 15CB.

Can a resident still borrow in rupees from an NRI relative?

No. That reverse provision was deleted with effect from 16 February 2026 by A.P. (DIR Series) Circular No. 22. The lending direction (resident to NRI relative) remains available; the borrowing direction for residents does not.

Who counts as a "relative" for this loan?

A relative as defined in Section 2(77) of the Companies Act, 2013 — a closed list including spouse, members of a Hindu Undivided Family, parents, children and siblings with their specified connections. Friends and extended kin outside that list do not qualify.