NRE vs NRO vs FCNR Account

The single question that decides which account you need: where did the money originate, outside India or within it. Everything else in this comparison follows from that one distinction.

Side by side

	NRE	NRO	FCNR
Holds	Foreign income only	Income earned in India (rent, pension, dividends) and existing India-sourced funds	Foreign income only
Currency	Indian rupees	Indian rupees	Foreign currency (USD, GBP, EUR, and others), no rupee conversion at all
Account types	Savings, current, FD, RD	Savings, current, FD, RD	Term deposit only, no savings or current option
Interest tax in India	Exempt under Section 10(4)(ii)	Fully taxable, roughly 30% plus surcharge and cess	Exempt
TDS	Nil	Deducted at source by the bank, reducible under DTAA with a Tax Residency Certificate and Form 10F	Nil
Repatriation	Principal and interest, fully free, no cap	Up to USD 1 million per financial year, with Form 15CA/15CB and proof taxes are settled	Principal and interest, fully free, no cap
Currency risk	Yes, on both deposit and repatriation, since it’s held in rupees	Yes, same as NRE	None on the principal, deposited and repaid in the same foreign currency

Why NRO exists despite the worse tax treatment

NRO isn’t a worse version of NRE, it’s a different-purpose account. Rent from a property you still own in India, a pension from a former Indian employer, dividends from Indian shareholdings, none of that is foreign income, so it can’t legally sit in an NRE or FCNR account at all. NRO is where India-sourced income has to go, the fully taxable interest and the repatriation cap are the cost of that, not a design flaw.

Most NRIs end up needing both an NRE (or FCNR) and an NRO account, not a choice between them, foreign earnings go through one, India-sourced income through the other. Depositing India-sourced income into an NRE account is a FEMA violation, not just a tax inefficiency.

FCNR versus NRE, when both would technically work

Both hold foreign income and both give tax-free, freely repatriable interest, the real difference is currency risk. An NRE deposit converts to rupees immediately, so rupee depreciation against your foreign currency erodes what you eventually repatriate, even though the interest itself was tax-free. An FCNR deposit stays in the original currency the entire time, you deposit dollars and get dollars back, with zero exposure to the rupee’s movement in between. The tradeoff is FCNR only comes as a term deposit, 1 to 5 years, with no interest at all on premature withdrawal inside the first year.

What happens to each account when you return to India

All three need redesignation once your FEMA status changes to resident, none of them can continue as-is. NRO simply becomes a resident account, with the interest staying taxable exactly as before. NRE typically converts to a resident rupee account. An existing FCNR deposit is usually allowed to run to maturity and then converts into an RFC (Resident Foreign Currency) account, which keeps the tax exemption only for as long as you remain RNOR, once you become ordinarily resident, RFC interest becomes taxable too. The exact treatment and timing during the RNOR window is genuinely worth confirming with a professional given how much it depends on your specific timeline, covered further in Residential Status under FEMA and Recent Immigrant.

Reducing NRO TDS through DTAA

The bank’s default NRO TDS rate is steep, but it isn’t necessarily what you end up paying. Submitting a Tax Residency Certificate from your country of residence along with Form 10F to the bank lets it apply the lower DTAA rate at source instead of the standard rate, rather than deducting the full amount and making you wait for a refund at filing. The reduced rate varies by treaty, worth checking the specific figure for your country of residence rather than assuming a flat number, and covered in more depth in DTAA.