Three accounts, two questions, one right answer
Most NRI explainers start with definitions. NRE stands for Non-Resident External, NRO for Non-Resident Ordinary and FCNR for Foreign Currency Non-Resident. Then comes a feature comparison and a table. By the end you know what each is and still don't know which to use.
NRE, NRO and FCNR are not alternatives. They solve different problems. The right account depends on two questions, and the second one is not about rate.
Question 1: Where did this money originate?
Money earned outside India (US paycheck, US business income, US brokerage dividends) can go into NRE or FCNR. Go to Question 2.
Money earned inside India (rent, Indian dividends, pension, sale proceeds) has one home, which is NRO. RBI rules forbid mixing foreign-source and India-source money. NRO is the collection account. From there you decide to keep, sweep to NRE, or repatriate.
Question 2: What is this money for?
If you're spending it in India (school fees, parents' care, retirement, charity, property), use NRE. Balances are held in rupees and are tax-free in India. The account matches the currency you will spend. The money was always going to be INR when you needed it.
If you're spending it in dollars (emergency reserves, US retirement, US down payment), use FCNR. It is held in foreign currency directly, usually USD, with no rupee depreciation, conversion timing or INR hedging. You give up some headline yield for a known dollar number on day one.
The mistake most NRIs make is defaulting to NRE for all foreign-source money because the rate is higher. Reverse the sequence. Figure out where the money will be spent, then pick the account that holds it in that currency.
Three common scenarios
The first is $30,000 a year from US salary for kids' schooling in Pune. Use NRE. This is foreign-source money with an India spend, and the currency need is rupees.
The second is a Bangalore apartment earning ₹4 lakh a month in rent. NRO is the only choice. Indian-source income lands in NRO. From there you keep it, sweep it to NRE annually, or repatriate.
The third is $50,000 of emergency money in an Indian bank for better-than-US-savings rates. Use FCNR. Emergency reserves should not be exposed to currency direction. FCNR earns USD interest with no INR translation, and it is tax-free in India.
Most NRIs end up with two of the three, NRO for collection and NRE for India spend. FCNR fits when the money is meant to be spent in dollars. That is more common than the "NRE for everything" advice acknowledges.
Stop picking accounts by rate. Pick by purpose. Use NRE for India spend, NRO for India income and FCNR for dollars.
What the IRS sees
"Tax-free in India" is half the sentence. There is still a US tax bill. The IRS taxes worldwide income, so NRE, NRO and FCNR interest all go on Schedule B at your ordinary rate.
NRE and FCNR have no Indian tax, so the US bill is straightforward. NRO had Indian tax withheld. You claim that as a Foreign Tax Credit on Form 1116, offsetting your US bill dollar-for-dollar.
This is why rate is the wrong way to choose. Look at any Indian bank's NRI rate card and the same rate applies to NRE and NRO. After both countries have taxed it, an NRO deposit with the treaty paperwork on file keeps almost exactly what an NRE deposit keeps. The numbers are in NRE and NRO pay the same rate. They don't pay the same return.
All three are also foreign financial accounts. Every one of them counts toward the $10,000 FBAR threshold, FCNR included. Dollars held at an Indian bank are still held at an Indian bank.
The RFC Account
The one account most NRIs only learn about when it's too late.
NRE, NRO and FCNR all share one assumption, which is that you stay an NRI. The day you move back to India for good, a different set of rules takes over. NRE balances can't stay NRE. NRO becomes a regular resident savings account.
FCNR, the one account that protected your dollars from rupee drag for years, has a maturity clock too. At maturity, you choose whether the balance becomes resident-rupee, RFC, or a resident-currency FD.
The RFC is the workaround.
It is a Resident Foreign Currency deposit account. It holds USD, GBP, EUR, JPY and a few others without forcing conversion to rupees. The dollars you accumulated as an NRI stay dollars after you return.
Returning NRIs (NRI, PIO, or OCI moving back) can open one. So can residents already in India receiving foreign-currency income such as overseas pensions, royalties and proceeds from selling US assets. Existing FCNR balances redesignate into RFC at the moment of return.
The account receives foreign-currency wires without INR conversion. It sends foreign currency abroad. It holds term deposits in foreign currency, auto-renewing at maturity.
The catch is the tax treatment. Interest is exempt under Section 10(15)(iv)(fa) while you're RNOR (Resident but Not Ordinarily Resident), typically 2 to 3 years after return. Once your status flips to ROR (Resident and Ordinarily Resident), slab-rate tax applies with TDS at source. RFC is a currency shelter first and a tax shelter second, and the tax window has a clock on it.
How long that window is for you depends on your days in India over the past 10 years. Our free RNOR calculator works it out.
The decision, in one pass
- For money already in India, use NRO. There is no second option. The only question is what happens next, which is to keep it, sweep it to NRE, or repatriate it.
- For money from outside India, to be spent in India, use NRE. Rupees go in and rupees come out.
- For money from outside India, to be spent in dollars, use FCNR. Dollars go in and dollars come out.
- If you are moving back for good, use RFC, before the FCNR matures and before the dollars get converted by default.
Playbook Move: Stop asking which account pays the highest rate. Ask where the money will be spent. For India spending, use NRE. For dollar spending, use FCNR. For money already in India, NRO is the only legal home, and the question becomes keep, sweep, or repatriate.
From Edition 2 of the NRI Playbook newsletter. For informational purposes only; not financial, tax, or legal advice. For decisions about your specific situation, consult a qualified cross-border tax professional.