Which account should hold which money?
The three account types available to non-resident Indians are not alternatives you choose between on preference. They exist because Indian exchange control distinguishes between money earned abroad and money earned in India, and each account is designed to hold one of those and not the other.
That distinction explains almost everything that follows. Foreign earnings go into an NRE or FCNR account, where they remain freely repatriable and the interest sits outside the Indian income tax charge. India-source income — rent, dividends, pension, proceeds from Indian assets — goes into an NRO account, where the interest is taxable, tax is deducted at source, and taking the money out again is subject to limits and documentation.
Most people hold at least two of these, so the question is rarely which one to open. It is which credits belong where, and what changes when you stop being a non-resident.
Who may hold each account, and the FEMA basis
Eligibility runs off the Foreign Exchange Management Act, not the Income-tax Act, and the two systems define residence differently. It is entirely possible to be non-resident for FEMA purposes and resident for income tax, or the reverse, and the accounts follow the FEMA definition.
The Foreign Exchange Management (Deposit) Regulations set out the permitted account types and who may hold them: broadly, persons resident outside India, with NRE and FCNR accounts additionally restricted to non-resident Indians and persons of Indian origin. RBI's Master Direction on Deposits and Accounts consolidates the operating detail — permitted credits and debits, joint holding, and what happens on a change of status. Where your bank's policy is stricter than the regulation, the bank's policy is what you will encounter.
Your FEMA status is what makes an NRE or FCNR account permissible at all, and it is worth checking separately from the India residential status test, which decides your income tax position rather than your banking one.
The NRE account: foreign earnings, freely repatriable
An NRE account is denominated in rupees but may only be credited with funds sourced outside India — remittances from abroad, foreign currency you bring in and tender, and transfers from other NRE or FCNR accounts.
Two features make it the default home for foreign earnings. The balance and the interest are freely repatriable, so money can return abroad without case-by-case approval. And interest is exempt from Indian income tax under the exemption in the Income-tax Act for interest on non-resident external accounts, which applies for as long as you hold non-resident status under FEMA.
The trade-off is currency: the balance is held in rupees, so a favourable interest rate can be undone by rupee movement over the term.
The NRO account: where India-source income has to land
An NRO account is the counterpart: the permitted destination for income arising in India — rent, dividends from Indian companies, an Indian pension, interest from Indian investments and proceeds from Indian assets.
Interest on an NRO account is India-source income and taxable. Indian banks deduct tax at source on payments to non-residents under the withholding provisions of the Income-tax Act, and deduction happens on payment rather than after any assessment of what you actually owe. Where a treaty provides a lower rate, claim it in advance with a Tax Residency Certificate and the prescribed declarations, or recover the excess by filing an Indian return — the subject of our guide to DTAA relief and the Tax Residency Certificate.
Repatriation from an NRO account is possible but conditional. RBI permits remittance within an annual limit per financial year, subject to certification of tax compliance by a chartered accountant on the prescribed forms. The limit and the forms are set by RBI and CBDT respectively and have changed over time, so confirm the current position rather than relying on a figure you read once. The mechanics are covered in repatriating funds from India.
FCNR(B): removing the rupee from the equation
An FCNR(B) deposit is a term deposit held in a permitted foreign currency rather than rupees. You receive back the currency you deposited, with interest, at a rate fixed for the term.
For someone whose spending and liabilities are in sterling, dollars or dirhams, this is the structural difference that matters. An NRE deposit converts your money into rupees and back later at an unknown rate; an FCNR deposit does not convert it at all. Interest is exempt from Indian income tax on the same basis as NRE interest, and the balance is freely repatriable.
The constraints: it is a term deposit rather than a current or savings account, only certain currencies are permitted, and RBI sets periodically revised ceilings on the rates banks may offer.
The three accounts compared
| NRE | NRO | FCNR(B) | |
|---|---|---|---|
| Currency | Indian rupees | Indian rupees | Permitted foreign currencies |
| Permitted credits | Funds sourced outside India | India-source income, and foreign remittances | Funds sourced outside India |
| Interest taxable in India | No | Yes | No |
| Tax deducted at source | No | Yes | No |
| Repatriability | Free | Within RBI's annual limit, with CA certification | Free |
| Account form | Savings, current or deposit | Savings, current or deposit | Term deposit only |
| Typical use | Parking overseas earnings in India | Receiving rent, dividends, pension | Holding foreign currency without rupee exposure |
Joint holding and the resident relative
NRE and FCNR accounts may be held jointly with another non-resident without particular difficulty. RBI has also permitted joint holding with a resident close relative, but on a former or survivor basis — the resident's rights arise on the death of the non-resident holder, not as an equal operating role.
NRO accounts may generally be held jointly with residents on more ordinary terms. Bank documentation practice varies widely, so confirm before opening.
What happens when you return to India permanently
Redesignation is the step people forget. Once you become resident under FEMA, NRE and NRO accounts must be redesignated as resident accounts, and the obligation to notify the bank falls on you.
The consequences are not merely administrative. The income tax exemption on NRE interest is tied to non-resident status, so it ends when that status does. Foreign currency balances have a designated destination: a Resident Foreign Currency (RFC) account, which lets a returning resident continue holding foreign currency in India. An existing FCNR(B) deposit may generally run to its contracted maturity in its original currency, with the proceeds then moving to an RFC account.
Time this alongside your income tax position deliberately, because the two statuses change on different tests and rarely on the same day. Our guide to RNOR planning for returning NRIs covers the income tax side of the same transition.
The error that causes the most trouble
The most common mistake is routing India-source income into an NRE account — usually rent from an Indian property, credited there because the NRE account is the one that repatriates freely.
It does not work, and it is not a technicality. NRE credits are restricted to funds sourced outside India, so the credit is impermissible the moment it is made. Banks must act on it, and the practical result is often a query against the whole account rather than the individual credit, at precisely the point you are trying to remit money out. Rent belongs in an NRO account, where tax deducted at source applies as it should — see NRI property rental income and TDS.
Compliance caveat
This guide describes the general structure of NRE, NRO and FCNR(B) accounts under the Foreign Exchange Management (Deposit) Regulations and RBI's Master Direction on deposits, and the broad income tax treatment of the interest. It does not address individual bank policy, the full documentation required for repatriation, treaty positions, the taxation of the underlying income, or foreign asset reporting in your country of residence. Interest rate ceilings, repatriation limits and prescribed forms are set by RBI and CBDT and change from time to time; confirm the current position before acting. Global Investments is not authorised by the Financial Conduct Authority or by the Securities and Exchange Board of India. This is a simplified guide, not tax, banking or investment advice.
How Global Investments can help
Account structure is usually settled early, badly, and then left alone until something goes wrong at the point of repatriation. Our advisers work with non-resident clients to map which income streams belong in which account, review whether existing balances were credited on a permissible basis, and plan the sequence of redesignation, FCNR maturity and RFC transfer around a return rather than after it. Where tax deducted at source can be reduced under a treaty, we coordinate with Indian specialists on the certification that claims it. Start with our NRI guides or get in touch.
Frequently asked questions
Can I deposit my Indian rental income into an NRE account?
No. The Foreign Exchange Management (Deposit) Regulations permit NRE credits only from funds sourced outside India, together with interest and permitted transfers within the NRE and FCNR framework. Rent from an Indian property is India-source income and belongs in an NRO account. Routing it into an NRE account misrepresents the origin of the funds, creates a FEMA irregularity that your bank is obliged to act on, and can complicate later repatriation of the whole balance rather than just the misplaced amount.
Is interest on an NRE account really free of Indian tax?
Interest on an NRE account is exempt from Indian income tax under the exemption in the Income-tax Act for interest on non-resident external accounts, and the exemption is tied to your holding non-resident status under FEMA rather than to the account label. It follows that the exemption falls away once you return to India permanently and the account has to be redesignated, which is why the redesignation date matters more than most people expect.
Why is tax deducted at source on my NRO interest?
Interest credited to an NRO account is India-source income and taxable, and Indian banks are required to deduct tax at source on payments to non-residents under the withholding provisions of the Income-tax Act. Deduction happens whether or not you will ultimately owe that much, so where a double tax treaty reduces the applicable rate you must claim it in advance with a Tax Residency Certificate and the prescribed declarations, or recover the excess by filing an Indian return.
What is the advantage of an FCNR deposit over an NRE deposit?
An FCNR(B) deposit is denominated in a permitted foreign currency, so the balance and the interest are not exposed to movements in the rupee. An NRE deposit is a rupee balance, and although it is freely repatriable, the amount you eventually convert back depends on the exchange rate at that time. FCNR removes that variable, generally in exchange for a different interest rate reflecting the currency the deposit is held in.
Can I hold an NRE account jointly with a resident relative?
RBI has permitted NRE and FCNR accounts to be held jointly with a resident close relative, but on a former or survivor basis rather than as an equal operating party, so the resident holder's rights arise on the death of the non-resident holder. Joint holding between two non-residents is treated differently and is generally less restricted. Bank practice varies in the documentation required, so confirm the specific basis with your bank before opening.
What happens to my FCNR deposit if I return to India before it matures?
RBI's Master Direction on deposits allows an existing FCNR(B) deposit to run to its contracted maturity in the original currency even after you become resident, at the contracted rate. On maturity the proceeds are normally converted to a Resident Foreign Currency account, which lets you continue holding the balance in foreign currency as a resident. The tax exemption on the interest, however, follows your residential status rather than the deposit term.
Do I need to close my NRO account when I move back to India?
You do not usually close it, but you must tell the bank that your residential status has changed so the account can be redesignated as an ordinary resident rupee account. FEMA places the obligation to notify on you, not the bank, and continuing to operate an account under a non-resident designation after you have become resident is the irregularity that most often surfaces during later scrutiny of a repatriation request.
This guide is general information only and does not constitute financial, legal or tax advice. Global Investments is not authorised by the Financial Conduct Authority or by the Securities and Exchange Board of India. Indian tax and exchange control rules change and individual circumstances vary. Always seek advice from a qualified adviser in the relevant jurisdiction before acting.