NRE Account Conversion & RNOR Guide for Returning NRIs/OCIs

Readers will learn how to smoothly handle NRE account conversion, understand RNOR tax benefits, and plan finances effectively — all covered in the NRE Account Conversion & RNOR Guide for Returning NRIs/OCIs.

📑 Table of Contents

I. Introduction & Definition

II. FEMA-Mandated Conversion of Your NRE Account (PROI → PRI)

III. The Income Tax Act Change in Your Tax Status (RNOR)

IV. Frequently Asked Questions (FAQs) About NRE Accounts

V. Conclusion

I. Introduction & Definition

When NRIs and OCIs return to India—whether temporarily or permanently—one of the biggest financial responsibilities is ensuring that their bank accounts and tax status comply with Indian law. Most people focus only on closing their NRE account or shifting money, but the reality is that returning to India triggers two separate, mandatory processes:

1. A FEMA-mandated conversion of your NRE account. (PROI to PRI)

2. The Income Tax Act mandated change in your tax status (RNOR)

These two processes are completely different but run in parallel.

This guide is specifically written for:

• NRIs (Indian citizens) living abroad, and
• OCIs (foreign citizens of Indian origin) who hold NRE/NRO accounts in India.

If you’re moving back, planning a long stay, or relocating permanently—this article will help you understand exactly what must be done.

✅ Definitions

📝Note on PROI, PRI and RNOR: PROI (Person Resident Outside India) and PRI (Person Resident in India) are FEMA residency categories, and they determine who can open or maintain NRE accounts, transfer funds, and hold foreign currency assets. RNOR (Resident but Not Ordinarily Resident) is a tax residency category under the Income Tax Act, and it does NOT make someone eligible for NRE accounts.

II. A FEMA-mandated conversion of your NRE account. (PROI to PRI)

This section explains the legal reason your NRE account cannot continue once you become a PRI again.

A. Understanding Your FEMA Status: PROI vs. PRI

Under FEMA (Foreign Exchange Management Act), your banking permissions depend solely on your residential status, which is defined by your intention to stay abroad or in India.

✅ PROI ❌ PRI

Only PROIs are allowed to hold.

• NRE accounts
• FCNR accounts
• Repatriable investments

This is why many returning NRIs/OCIs (PROIs) must convert their accounts immediately, even if they have been in India for only a few days.

B. The NRE Account Conversion Process (PROI → PRI)

Once you become a PRI, you are legally required to convert your NRE account within the bank’s specified timeframe (typically 30 to 90 days).

• Conversion Options: The NRE account must be redesignated into either a standard Resident Rupee Account or a Resident Foreign Currency (RFC) Account.
• Benefits of RFC: The RFC account is often the preferred choice because it allows you to hold your funds in foreign currency (USD, EUR, etc.) and retains a degree of repatriation flexibility.
• Action Before Conversion: While the account is still NRE, funds are fully and freely repatriable. You may choose to transfer funds abroad or move the balance to an RFC account to secure currency and tax benefits.
• Loss of Benefits: Once converted to a Resident Rupee Account, the funds lose their automatic repatriability, and subsequent interest becomes taxable.

C. Key Differences After Conversion

1. Repatriation

• Before conversion: NRE funds are fully repatriable.
• After conversion: Funds lose full repatriability unless moved to an RFC account.

2. Taxation

• During NRE status: Interest is tax-free in India.
• After conversion (Resident Account): Interest becomes fully taxable.

This change happens from the date of status change, not the date the bank processes the conversion.

III. 💸 The Income Tax Act mandated change in your tax status (RNOR)

While FEMA mandates the account change, the Income Tax Act separately determines your tax liability.

The RNOR Tax Status: A Temporary Benefit

The Resident but Not Ordinarily Resident (RNOR), status as explained in the table above is a temporary, beneficial classification for returning NRIs/OCIs that uses strict day-count rules (unlike FEMA’s intention rule). RNOR protects your foreign income from tax even after you lose NRE eligibility.

• The Biggest Benefit: Converting your NRE account does NOT mean losing your tax benefits. During the RNOR years, your foreign income (overseas salary, foreign interest, foreign capital gains) earned and received outside India is generally NOT taxable in India.
• NRE/FCNR to RFC: Interest earned on funds transferred from your NRE or FCNR accounts into a Resident Foreign Currency (RFC) Account remains tax-free in India for the entire duration you hold RNOR status.
• Qualifying for RNOR: You automatically qualify for RNOR if you meet specific historical criteria, such as being a Non-Resident in 9 out of the 10 preceding financial years, or spending less than 730 days in India over the last 7 years.

The Tax Transition Path

Every returning individual passes through the sequence: Non-Resident (NR) to RNOR to Full Resident.

• The beneficial RNOR status typically lasts for 1–3 financial years.
• Once the RNOR period ends, you become a Full Resident for tax purposes, and your worldwide (global) income becomes fully taxable in India.

IV.❓ Frequently Asked Questions (FAQs) About NRE Accounts

1. Can I open an NRE account jointly with another person?

Yes. You can open an NRE account jointly with another NRI or OCI.
While the operation of the account is restricted, an NRI/OCI CAN open a joint NRE account with a Resident Indian relative. This is permissible only on a “Former or Survivor” basis.

2. Can an RNOR open an NRE account?

No. An RNOR is treated as a Resident under FEMA, so they are not eligible to open or maintain an NRE account.
If you become RNOR after returning to India, your existing NRE account must be re-designated as a Resident or RFC account.

3. Is the money in an NRE account tax-free?

Yes. The balance and interest in an NRE account are completely tax-free in India—no income tax, no TDS.
However, your country of residence may tax the interest, depending on its local laws.

4. Can I freely repatriate money from my NRE account?

Yes. NRE accounts offer full repatriability, meaning you can send money abroad anytime, in any amount, without restrictions.

5. What currency can I deposit in an NRE account?

Only foreign currency can be deposited into an NRE account.
Banks will convert it into INR at the prevailing exchange rate.
You cannot deposit Indian rupees (cash or transfers) into an NRE account.

6. Can I transfer money from my NRE account to an NRO account?

Yes, you can transfer any amount from NRE → NRO.
But transferring from NRO → NRE is restricted and allowed only for certain types of income after paying applicable taxes. (To learn which account is right for your funds, see: NRE vs. NRO: The Complete Difference).

7. Can a person with a foreign passport (OCI) open an NRE account?

Yes. OCI cardholders living abroad are fully eligible to open and maintain NRE accounts.

8. What happens to my NRE account if I return to India permanently?

You must inform your bank immediately.
Your NRE account will be converted to a Resident account or RFC account.
Continuing an NRE account after becoming resident is a FEMA violation.

9. Is NRE interest rate higher than domestic savings accounts?

Generally yes. NRE savings and deposits often offer higher interest rates, but this varies by bank.

10. Which account should I use for remittances to India?

If you are NRI/OCI, the NRE account is the primary account used for remittances to India because it keeps your money:

• Tax-free
• Fully repatriable
• Maintained in INR while deposited via foreign currency

V. Conclusion

Returning to India—whether temporarily or permanently—creates two parallel financial obligations:

1. FEMA Requirement:

Convert your NRE account to a Resident or RFC account once you become a PRI (resident).

2. Income Tax Benefit:

Understand and take advantage of RNOR status, which can significantly reduce your tax burden on foreign income during the initial years after return.

Because FEMA rules, resident definitions, and tax computations are complex—and each individual’s travel history is different—always consult:

✔ A Chartered Accountant (CA)

✔ A FEMA/NRI-specialized financial advisor

They will help you structure your transition correctly, avoid penalties, and maximize tax benefits.

Disclaimer: This article is for informational purposes only. Regulations can change, and individual situations may vary. Always verify details before making decisions.