NRE vs NRO vs FCNR: FEMA Account Matrix for NRI, OCI and Returning Residents
Foreign salary belongs in an NRE account — its interest is exempt under s.10(4) and the balance is freely repatriable — while NRO accounts, funded by Indian rent and dividends, suffer 30% TDS on interest and limit repatriation to USD 1 million a year. FCNR holds foreign currency deposits with no exchange risk.
Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Salary earned abroad should be deposited in an NRE account, where interest is exempt under s.10(4) of the Income Tax Act 1961 and the principal is freely repatriable — not in an NRO account, where interest suffers 30% TDS under s.195 and repatriation is capped at USD 1 million a year. NRE, NRO and FCNR are the three non-resident accounts regulated under FEMA, and each serves a different money flow. Choosing the wrong one converts exempt interest into taxed income and turns free repatriation into a compliance exercise.
NRE vs NRO vs FCNR: The Matrix
The one-line rule: foreign money → NRE or FCNR; Indian money → NRO. Do not deposit Indian rent into an NRE account (FEMA violation) and do not park foreign salary in an NRO account (taxable interest, capped repatriation).
Worked Example: Suresh's Account Structure
Suresh, an NRI in the US, structures his three accounts correctly in FY 2025-26:
NRE account — foreign salary:
- Salary remitted: $80,000 × ₹84 = ₹67,20,000.
- Interest earned: ₹1,20,000 → exempt u/s 10(4), not reportable as taxable income.
- Balance freely repatriable to his US account.
NRO account — Indian rent:
- Rent from his Chennai flat: ₹6,00,000 credited to NRO.
- Interest on the NRO balance: ₹40,000 → taxable, TDS at 30% = ₹12,000 deducted by the bank.
- Repatriation of the after-tax rent is limited to USD 1 million/FY across all NRO balances.
FCNR deposit — foreign-currency savings:
- $50,000 in a 1-year FCNR (B) deposit at 4% p.a.
- Interest: $2,000 × ₹84 = ₹1,68,000 → exempt u/s 10(4), repatriable in USD with no exchange loss.
The comparison: if Suresh had put his salary in the NRO instead, ₹1,20,000 of interest would be taxable at 30% (₹36,000 tax), and every rupee of the balance would count against his USD 1 million annual repatriation cap. The NRE choice saves him both the tax and the cap.
Interest Taxation: What s.10(4) Actually Covers
Section 10(4) exempts interest income of a person resident outside India from:
- An NRE account maintained in accordance with RBI regulations, and
- An FCNR (B) account.
The exemption is tied to your status as a non-resident. The moment you return to India and become a resident, the s.10(4) exemption ceases for interest credited after you become resident — a common surprise for returning NRIs who keep their NRE accounts running.
NRO interest has no exemption: it is taxable income from other sources, with TDS at 30% (plus surcharge and cess) deducted u/s 195 by the bank, claimable as a credit in your ITR.
Returning Resident: What Happens to the Accounts
When you return to India permanently, your NRE and FCNR accounts stop being non-resident accounts:
- NRE/FCNR: the bank converts the account to a resident account (or to an RFC — Resident Foreign Currency account for the foreign-currency portion). The conversion should happen within a reasonable time after return — generally taken as about 3 months
- NRO: the account is converted to a resident savings account on return.
- Interest after return becomes taxable (s.10(4) no longer applies to you as a resident).
Plan the conversion date carefully: interest earned up to the conversion is exempt; interest after it is taxable. Delaying conversion does not extend the exemption.
Changed FY 2025-26: For FY 2025-26, the interest exemption under s.10(4) continues for genuine non-residents holding RBI-compliant NRE/FCNR accounts; the TDS on NRO interest remains at the 30% statutory rate. The exact NRE/FCNR conversion timeline for returning residents follows the RBI/authorised-dealer guidelines in force — confirm the current directive with your bank.
Common Mistakes
- Depositing Indian rent into an NRE account — a FEMA violation; only foreign income belongs in NRE.
- Parking foreign salary in NRO — converts exempt interest into 30%-taxed income and consumes the repatriation cap.
- Assuming NRO interest is exempt — it is not; only NRE and FCNR interest qualify under s.10(4).
- Keeping NRE/FCNR after returning — the exemption ends on becoming resident; convert to resident/RFC accounts promptly.
- Ignoring the USD 1 million NRO cap — repatriation above it requires prior RBI approval.
FAQ
Q1: Should my foreign salary go into NRE or NRO?
NRE. Foreign salary is the classic NRE deposit — interest is exempt under s.10(4) and the balance is freely repatriable. NRO is for India-sourced income and carries 30% TDS on interest with a USD 1 million repatriation cap.
Q2: Is NRO interest taxable?
Yes. Interest on an NRO account is taxable income from other sources, with TDS at 30% deducted by the bank under s.195. You claim the TDS credit in your ITR.
Q3: Is NRE interest really tax-free?
Yes, for a person resident outside India. Section 10(4) exempts interest on RBI-compliant NRE accounts. The exemption ends when you return and become a resident.
Q4: What is the repatriation limit for NRO accounts?
USD 1 million per financial year from the NRO account, subject to tax compliance, under RBI's non-resident account framework. Amounts above this need prior RBI approval.
Q5: Can I hold an FCNR account as a returning resident?
The FCNR account must be converted on return. The foreign-currency funds can move to an RFC (Resident Foreign Currency) account or a resident account within the applicable timeline.
Q6: Can a resident jointly hold an NRE account?
No. NRE/FCNR accounts can be held jointly only with other non-residents (NRIs/PIOs/OCIs). NRO accounts allow joint holding with a resident close relative under FEMA rules.
Q7: Which account should I use for an overseas investment purchase?
Use NRE/FCNR funds, which are freely repatriable, so the overseas purchase is straightforward. Using NRO funds for an overseas investment consumes your USD 1 million cap and requires the NRO repatriation compliance route.
Use our FEMA Account Selector to choose the right account structure for each money flow.
Sources
- Foreign Exchange Management (Deposit) Regulations, 2000 — NRE, NRO and FCNR (B) accounts.
- Section 10(4), Income-tax Act 1961 — exemption for NRE/FCNR interest.
- Section 195, Income-tax Act 1961 — TDS on NRO interest.
- RBI Master Directions on Non-Resident Accounts and Deposits — repatriation limits and conversion on return.
Structure your accounts by money flow — foreign money in NRE/FCNR, Indian money in NRO — and convert on return before the exemption lapses. Book a consultation at harunraaj.com.
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See Also
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Statute-cited, section-by-section guides covering the same ground this article does.
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