This is one of the most confusing aspects of returning to India. You've built up substantial NRE fixed deposits over the years. The interest is tax-free, the rates are decent, and the money is fully repatriable. Now you're moving back, and suddenly everything changes.
Or does it?
I've seen returning NRIs lose lakhs of rupees because bank staff gave them wrong information. They broke their FDs prematurely, lost the contracted interest rates, and ended up paying penalties - all because they didn't know the actual RBI rules.
Let me clear up the confusion.
The Basic Rule: You Must Convert Your Accounts
Once you become a resident Indian under FEMA (Foreign Exchange Management Act), you cannot maintain NRE or NRO accounts. This happens when you stay in India for more than 182 days with the intention to remain.
Your NRE savings account must be converted to either a resident savings account or a Resident Foreign Currency (RFC) account. Your NRO account converts to a regular resident account.
This conversion should happen immediately upon your status change. There's no grace period written in RBI regulations.
👉 Tip: Inform your bank within 3-6 months of returning. Delaying can cause compliance issues during audits.
But Here's What Most Banks Get Wrong
When you visit your bank to convert accounts, they'll often ask you to break your NRE FDs and open fresh resident FDs.
This is incorrect.
RBI Master Directions clearly state that existing NRE FDs can continue until maturity at the originally contracted interest rate. The FD gets re-designated as a resident FD, but the rate and tenure remain unchanged.
This matters enormously. If you opened a 5-year NRE FD three years ago at 8.5%, and current resident FD rates are 6%, breaking that FD costs you 2.5% annually on whatever time remains.
One reader I know had FDs across 8 banks. He fought with each one, citing RBI guidelines. It took him six months, but he eventually got all banks to re-designate his NRE FDs as resident FDs without breaking them.
The lesson? Know your rights and be persistent.
What About Tax on the Interest?
Here's where RNOR status becomes your best friend.
When you return after being abroad for many years, you likely qualify as Resident but Not Ordinarily Resident (RNOR). This status lasts for 2-3 years and offers significant tax benefits.
You qualify as RNOR if you were:
- NRI for 9 out of the previous 10 years, OR
- In India for 729 days or less during the previous 7 years
During your RNOR period, interest on your re-designated NRE FDs remains tax-free. This is because foreign income and income from foreign sources is not taxable for RNOR individuals.
Once you become Resident and Ordinarily Resident (ROR), the interest becomes fully taxable at your slab rate.
👉 Tip: Calculate your RNOR duration carefully. If your FDs mature within this window, you pay zero tax on the interest.
NRO FDs: Different Treatment
NRO fixed deposits work differently. The interest was always taxable at 30% TDS even when you were an NRI.
After you return, your NRO FD converts to a resident FD. The interest continues to be taxable, but now at your applicable slab rate instead of the flat 30%.
If your total income puts you in a lower tax bracket, you might actually pay less tax as a resident than you did as an NRI. And if you qualify as RNOR, you can claim DTAA benefits where applicable.
The RFC Account Option
A Resident Foreign Currency (RFC) account lets you hold foreign currency in India after returning. This is valuable if you want to avoid converting everything to rupees at once.
You can transfer your NRE FD proceeds to an RFC account upon maturity. The money stays in foreign currency (USD, GBP, EUR, etc.), and you choose when to convert based on exchange rates.
Key benefits of RFC accounts:
Tax-free interest during RNOR period. Interest earned in RFC accounts remains exempt while you're RNOR.
Full repatriability. If you decide to move abroad again, you can transfer RFC funds to NRE/FCNR accounts without any limits.
Currency flexibility. You time conversions based on rupee movements rather than being forced to convert immediately.
The downside? RFC interest rates are much lower than rupee FD rates - often comparable to foreign savings account rates (0.25% to 1%). You're essentially accepting lower returns for flexibility.
FCNR Deposits: The Longest Runway
Foreign Currency Non-Resident (FCNR) deposits held in USD, GBP, or other currencies can continue until maturity even after you return.
Since the principal and interest are both in foreign currency, there's no rupee conversion until maturity. The interest remains tax-free during your RNOR period.
Upon maturity, you have three options:
- Convert to rupees and deposit in a resident account
- Transfer to an RFC account to keep holding foreign currency
- Repatriate abroad if you're moving again
If you have FCNR deposits maturing after your RNOR period ends, the interest from the date you become ROR will be taxable.
Timeline of What Happens
Day of Return: Your status changes to resident under FEMA. NRE/NRO accounts should be converted. FDs can continue till maturity.
First 182 Days: You're settling in. Inform banks, submit conversion forms, update KYC documents. Consider opening an RFC account if you want to hold foreign currency.
Year 1-2 (RNOR Period): Interest on re-designated NRE FDs and RFC accounts remains tax-free. Use this window wisely for any FDs maturing during this time.
Year 3+ (ROR Status): All interest becomes taxable. Plan your investments accordingly. Consider tax-efficient options like GIFT City FDs that remain tax-free even for residents.
Common Mistakes to Avoid
Breaking FDs unnecessarily. Don't let bank staff pressure you into premature closure. Cite RBI Master Directions on deposit re-designation.
Not informing banks promptly. Continuing to operate NRE accounts after becoming resident is a FEMA violation. Banks discover this during audits and can back-tax the interest.
Converting everything to rupees immediately. If you might move abroad again or want currency flexibility, use RFC accounts. Once you convert to rupees as ROR, getting money out requires LRS limits and TCS payments.
Ignoring RNOR benefits. Many returning NRIs don't realize they qualify for RNOR or how long it lasts. This costs them significant tax savings.
Renewing FDs as resident during RNOR. New deposits as a resident are taxable from day one, even if you're RNOR. The tax-free treatment applies only to existing NRE/FCNR deposits and RFC interest.
Smart Strategy for Returning NRIs
If you're planning your return, here's what I recommend:
Before returning: Check all your FD maturity dates. Ideally, they should fall within your RNOR period (2-3 years after return).
Immediately after return: Inform all banks. Request re-designation of NRE FDs to resident FDs at contracted rates. Open an RFC account for any foreign currency you want to preserve.
During RNOR period: Let existing FDs mature tax-free. Avoid opening new rupee FDs as the interest will be taxable. Consider GIFT City USD FDs which remain tax-free even after RNOR ends.
As RNOR nears end: Restructure your portfolio for tax efficiency. Move to tax-saving instruments, mutual funds, or GIFT City products.
Compare FD rates and options using our NRI FD Comparison Tool. It shows rates across NRE, NRO, FCNR, and GIFT City deposits from all major banks.
The GIFT City Advantage
Here's something most returning NRIs don't know: GIFT City fixed deposits offer tax-free interest regardless of your residential status.
Unlike NRE FDs that lose tax-free status when you become ROR, GIFT City operates as a special economic zone with its own tax rules. The interest remains exempt whether you're NRI, RNOR, or ordinary resident.
Plus, these are USD-denominated deposits. As the rupee depreciates (it has historically averaged 3-4% annually against USD), your principal value in rupee terms increases.
For returning NRIs, GIFT City FDs solve the problem of what to do after RNOR status ends. The tax efficiency continues indefinitely.
Planning your return to India? Use our Residential Status Calculator to determine your exact status and plan your tax strategy.
Have questions about managing your FDs and investments during transition? Join our WhatsApp community where returning NRIs share experiences and get answers from financial experts.
Ready to explore tax-efficient investment options? Download the Belong app and discover GIFT City USD fixed deposits with tax-free returns.
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