FCNR(B) vs NRE vs NRO: Which Account Does What

Assuming you are an NRI earning in a foreign currency, with surplus to send back to India, and you walk into a bank branch (or a video-KYC app) and the relationship manager asks you which account you want to open. There are three answers that are all correct, and the right one depends on what you intend to do with the money. The reason the three exist is that India treats your money differently based on what currency it arrived in and whether you want to take it out again.

It is useful to separate the three on three axes: currency of the deposit, who can tax the interest, and how easy it is to send the money back out.

1. What each account actually does

The plain mechanics, set out side by side:

                     NRE Savings/FD          NRO Savings/FD           FCNR(B) Deposit
Currency             INR                     INR                      Permissible foreign currency
Funding source       Foreign income +        Indian + foreign         Foreign income only
                     certain Indian
                     current income
Interest taxable?    No (status exempt)      Yes (Indian slab)        No (status exempt)
TDS at source        Nil                     Yes                      Nil
Principal repat.     Free                    USD 1M/yr cap on         Free
                                             balances
Interest repat.      Free                    Free (current income     Free
                                             treated separately)
FX risk on holder    Yes (INR depreciation)  Yes (INR depreciation)   No (kept in FX)
Joint with resident? Former-or-survivor      Former-or-survivor       Former-or-survivor
Tenor                On demand / 1-10y       On demand / 7d-10y       1 to 5 years only

The defining test for all three is the FEMA residency status, not your visa or your tax filing. The Reserve Bank's Master Direction on Deposits and Accounts of Non-Residents (FED Master Direction No. 14/2015-16) is the operational rulebook, framed under the Foreign Exchange Management Act, 1999. If you stop being a person resident outside India under FEMA, the eligibility to open or continue these accounts changes immediately.

2. The tax surface

This is where the three diverge sharply, and where most of the bad advice lives.

NRE interest is exempt under Section 10(4)(ii) of the Income-tax Act, 1961, for an individual who is a person resident outside India under FEMA, or who is permitted by the RBI to maintain the account. The exemption depends on that status, not on when the bank updates the label.

FCNR(B) interest is exempt under Section 10(15)(iv)(fa). The clause exempts interest payable by a scheduled bank to a non-resident, or to a not-ordinarily-resident, on RBI-approved foreign-currency deposits. The RNOR carve-out is important on return because it can extend the exempt window for a couple of assessment years; the practical step is to confirm the RNOR computation each year with a CA who is looking at your day-counts.

NRO interest is taxable in India at applicable slab rates. Banks deduct TDS for non-residents under Section 195 at the rates in force (commonly 30% plus surcharge and cess for individual NRIs absent treaty relief), unless the treaty rate applies under Section 90(2)/(4) with a valid Tax Residency Certificate and, where required, Form 10F under Rule 21AB. A separate lower- or nil-deduction certificate is also available from the Assessing Officer under Section 197 by filing Form 13. If the source country also taxes the interest, you may be eligible for Foreign Tax Credit there under that country's domestic mechanism. The takeaway is that NRO interest is the only one of the three that always shows up on an Indian return.

3. Repatriation

NRE balances move out without limits and without a separate filing; that is the structural design of the account. FCNR(B) is the same on principal and interest, since the funds entered in foreign currency and never converted.

NRO carries the USD 1 million per financial year cap on remittance of balances under FEMA, net of applicable taxes. The remittance is processed by the bank against Form 15CA, with a Chartered Accountant's Form 15CB where the payment is chargeable to tax and the conditions of Rule 37BB are not met for a lower-grade reporting. Separately from this cap, current income credited to the NRO account (rent, dividend, pension, interest) is freely remittable subject to taxes and bank documentation. The cap applies to the underlying balance, not to ongoing current-income flows.

The thumb rule: money earned abroad and parked in India through NRE/FCNR(B) leaves freely. Indian-source balances sit behind the NRO USD 1 million gate, while current income on those balances has its own remittance route.

4. When each one actually fits

To each on their own, but here is how the three sort in practice.

The NRE account is the working answer for foreign-currency earnings that you want held in INR with the optionality to bring them back out later. The deposit carries INR FX risk until you convert back, and the rate is priced off domestic FD rates. Certain current income from India (rent, dividend, pension, interest) is also permitted to be credited to NRE, per RBI MD 4.7, so the account is not strictly foreign-funded only.

The FCNR(B) account is the working answer for foreign-currency earnings parked in India for a fixed tenor between 1 and 5 years without taking INR FX risk on the principal. The deposit rate ceiling is fixed by RBI as a spread over the relevant alternative reference rate for that currency, and the principal stays denominated in the chosen currency through maturity.

The NRO account is the only place that can legally receive certain Indian-source receipts where the NRE route is not available, including the proceeds of an Indian property sale, capital gains, and inheritance credits. Most NRIs end up holding it alongside an NRE or FCNR(B) for that reason.

5. The redesignation moment

The three accounts are open only as long as the holder is a person resident outside India under FEMA. On return, the NRE and FCNR(B) eligibility ends. NRO is redesignated as a resident account. NRE balances are typically transferred to a Resident Foreign Currency (RFC) account or to a resident rupee account at the holder's choice. FCNR(B) deposits are permitted to continue until maturity, after which the proceeds may be credited to RFC or to a resident deposit.

The practical step is not "wait until the next tax return"; it is informing the bank in writing when residency changes, and letting the bank apply the redesignation. The Section 10(4)(ii) exemption stops on the residency-status change date regardless of when the bank updates the label, and FCNR(B) interest may remain exempt during any RNOR period.

Sources:

• Foreign Exchange Management Act, 1999, full text (IndiaCode): https://www.indiacode.nic.in/bitstream/123456789/1988/1/A1999_42.pdf
• Income-tax Act, 1961, full text (IndiaCode), Sections 10(4)(ii), 10(15)(iv)(fa), 90, 195, 197: https://www.indiacode.nic.in/bitstream/123456789/2435/1/a1961-43.pdf
• RBI Master Direction on Deposits and Accounts (FED Master Direction No. 14/2015-16, updated): https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10198
• Income-tax Department e-filing portal (for Form 10F, Form 13 under Section 197, and Form 15CA): https://eportal.incometax.gov.in/
• Income-tax Department main portal (for current rates, forms, and FAQs): https://www.incometax.gov.in/iec/foportal/