What happens to the tax exemption on NRE and FCNR interest when I become an RNOR?

Q. I have been an NRI for the past 24 years. I have some NRE and FCNR deposits which will mature after 1-April-2026. If I come back to India in July 2025 for good, my residential status for AY-2026-2027 will be Resident but Not Ordinary Resident (RNOR). Do I have to liquidate all my NRE and FCNR deposits or can I hold these deposits up to maturity? How will my tax liability be determined for interest on such fixed deposits?

Interest on NRE (Non-Resident External) deposits as well as FCNR (Foreign Currency Non-Resident) deposits are fully exempt in the hands of a non-resident as per the provisions of the Income Tax Act, 1961.

Tax implications on NRE deposits after return

When you come back to India with an intention to stay in India for an indefinite period, you become a resident under the FEMA (Foreign Exchange Management Act) laws immediately on your arrival in India. Once you become a resident under FEMA, you are required to convert your existing NRE accounts to either a regular resident rupee account or RFC (Resident Foreign Currency Account).

While the deposits can be continued with the stipulated rate of interest till maturity, the interest after the date of your arrival in India will become taxable in India. The bank will deduct tax at source on the interest credited for the period post your arrival in India.

As far as deposits in FCNR deposits are concerned, you can continue to have the FCNR deposits till their maturity, and on maturity, the deposits have to be converted into resident rupee accounts or transferred to RFC accounts.

Unlike interest on NRE deposits, which becomes taxable once you become a resident under FEMA, interest on an FCNR account does not become taxable in India immediately on your coming back to India and will continue to remain tax exempt as long as you remain a non-resident or a resident but not an ordinary resident under income tax laws.

Read all our personal finance stories here.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on his X handle.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before making any investment decisions.