NRE or NRO account: which should an NRI in the UAE use, and is the interest taxable?

Many Indians who move to Dubai, Abu Dhabi or Sharjah keep money in India: savings, fixed deposits, rent from a flat in Mumbai or Thane, dividends. The bank will offer an NRE account, an NRO account, and often an FCNR deposit. The three look similar but are treated very differently, both under the Foreign Exchange Management Act, 1999 (FEMA) and for income tax. Here is the short answer, followed by the detail.

Two different tests run through this note. FEMA status decides which accounts you may hold: broadly, if you have gone to the UAE for work, business or an indefinite stay, you are a person resident outside India under FEMA. Income-tax status (non-resident, resident but not ordinarily resident, or resident) is decided separately under section 6 of the Income-tax Act, 2025, mainly by days spent in India. The two usually match, but not always (see part 6 below).

1. The three accounts at a glance

Under a "former or survivor" arrangement, the first-named holder operates the account, and the joint holder can operate it only after the first holder's death. On an NRE account, a resident relative can act during your lifetime only as your power of attorney holder. "Relative" has the meaning given in the Companies Act, 2013, which includes parents, children, spouse and siblings.

2. What can go into each account

NRE. The usual credits are remittances from abroad, such as your UAE salary, and transfers from another NRE or FCNR account. RBI also allows current income such as rent, dividends, pension or interest to be credited to an NRE account, provided the bank is satisfied that tax on it has been deducted, paid or provided for. In practice many banks prefer to route Indian income through an NRO account first, so check your bank's procedure.

NRO. This is the account for money that arises in India: rent, dividends, pension, the sale proceeds of property or shares, and other legitimate dues. It can also receive remittances from abroad. It can be used for local payments in rupees, including investments in India that the FEMA rules permit.

Moving money from NRO to NRE. Balances other than current income can be transferred from an NRO account to an NRE account only within the same USD 1 million a year allowed for remittances abroad, after tax, and with the same tax forms the bank asks for on a remittance.

3. Sending money back to the UAE

NRE and FCNR balances are fully repatriable, without the cap that applies to NRO accounts, subject to the bank's usual documentation.

From an NRO account, RBI's directions allow current income, such as rent, dividends, pension and interest, to be remitted abroad after tax. Apart from current income, an NRI or PIO can remit up to USD 1 million (about AED 3.67 million) per financial year out of other NRO balances and the sale proceeds of assets, net of applicable taxes. Some banks apply the limit more conservatively, so confirm their practice before you plan a large transfer.

The bank will ask for the remittance details in the format the tax department prescribes. Under the Income-tax Rules, 2026, the declaration formerly called Form 15CA is now Form 145. Where the amount is chargeable to tax and exceeds ₹5 lakh in the tax year, a chartered accountant's certificate in Form 146 (formerly Form 15CB) is also generally needed, unless the tax officer has issued a certificate. Our note on NRIs selling property in India explains how this works for sale proceeds.

4. Is the interest taxable in India?

NRE interest. For an individual, interest on an NRE account is exempt from Indian income tax under Schedule IV, Sl. No. 1 of the Income-tax Act, 2025 (section 10(4)(ii) of the 1961 Act). The condition is the FEMA test, not the income-tax one: you must be a person resident outside India as defined in FEMA, or have RBI's permission to keep the account. If you file a return, the interest is shown in it as exempt income.

FCNR interest. Interest on FCNR(B) deposits is exempt under Schedule IV, Sl. No. 14 of the 2025 Act, which carries forward the exemption in section 10(15)(iv)(fa) of the 1961 Act. That condition is the income-tax test: the depositor must be non-resident, or resident but not ordinarily resident.

NRO interest. Interest on an NRO account is taxable in India. The bank deducts tax at source under section 393(2) of the 2025 Act (section 195 of the 1961 Act) at the "rates in force". For a non-resident individual that is 30%, plus a surcharge only at higher income levels, plus 4% health and education cess: about 31.2% in the usual case. Tax is deducted from the first rupee, and non-residents cannot give the bank the no-deduction declaration that residents use.

The interest is then taxed at your slab rates in your Indian return. An individual who is non-resident for income tax cannot claim the rebate under section 156 (section 87A of the 1961 Act), which is only for residents, so for a small income it is the basic exemption limit that matters. Our income tax slabs page shows the current limits. If the tax deducted is more than the tax due, you can claim the excess back by filing a return. Or, before the interest is paid, you can apply to the tax officer for a lower or nil deduction certificate under section 395 of the 2025 Act (section 197 of the 1961 Act).

5. The India–UAE tax treaty on NRO interest

Under Article 11(2) of the India–UAE tax treaty, India's tax on interest paid to a UAE resident who is the beneficial owner of the interest (the person actually entitled to it) may not exceed 12.5%. The "rates in force" for tax deducted from payments to non-residents include treaty rates. So a bank can deduct at 12.5% instead of about 31.2% if you give it the required documents. Under section 159(8) of the 2025 Act (sections 90(4) and 90(5) of the 1961 Act), treaty benefit needs:

• a tax residency certificate from the UAE Federal Tax Authority for the relevant period; and
• the prescribed information in Form 41, which has replaced Form 10F under the Income-tax Rules, 2026.

Banks usually also ask for your PAN and a self-declaration in their own format.

One condition is often missed. For the treaty, an individual is a UAE resident only if present in the UAE for at least 183 days in the calendar year. The test runs by calendar year, while the Indian tax year runs from April to March, so one Indian tax year involves two calendar years. A UAE residency certificate issued under the UAE's shorter domestic tests does not by itself show 183 days. Someone who spends long periods in India, or moved to the UAE part-way through the year, may not qualify, and the bank will then deduct at the full rate. If you are also resident in India for income tax, the treaty's tie-breaker rules decide which country you are resident in for treaty purposes.

If the bank has already deducted at the full rate, you can still claim the treaty rate in your Indian return and have the excess refunded, provided the certificate and Form 41 are in place. For a small amount of interest, your slab rates may give a lower tax than the treaty's 12.5% in any case.

6. When you become an NRI, when the two tests differ, and when you come back

On leaving India. Once you become a person resident outside India under FEMA, your existing resident savings accounts should be redesignated as NRO accounts. Keeping a resident account after that is a FEMA lapse, and its interest is taxable just like NRO interest, so tell your bank promptly.

When FEMA status and income-tax status differ. The account rules follow FEMA, but income-tax residence follows section 6 of the Income-tax Act, 2025. Because the UAE levies no personal income tax, an Indian citizen working in the UAE whose income other than foreign-source income exceeds ₹15 lakh in a tax year can be deemed resident in India. Such a person is treated as resident but not ordinarily resident. Separately, an Indian citizen or person of Indian origin visiting India, with income other than foreign-source income above ₹15 lakh, becomes resident if they spend 120 days or more in India in the year and 365 days or more in the four preceding years; if the stay is under 182 days, they are resident but not ordinarily resident. In both cases you remain a person resident outside India under FEMA, so your NRE account and its exemption are unaffected, and FCNR(B) interest stays exempt. Your return, the rebate and the treaty position then need to be worked out on that basis, and the bank will usually keep deducting tax at the non-resident rate.

On returning to India. Although FEMA's definition refers to more than 182 days in India in the preceding financial year, a person who returns to take up employment, carry on business or stay for an uncertain period is treated as resident from the date of return, and RBI requires NRE accounts to be redesignated immediately. A short visit does not by itself change your status. At that point your NRE and NRO accounts are to be redesignated as resident accounts, or NRE and FCNR balances can be moved to a Resident Foreign Currency (RFC) account. From then on, interest that would have been exempt in an NRE account is generally taxable. That is so even while you are "not ordinarily resident" for income tax, a transitional status that many returning NRIs have for a year or two. RBI allows banks to let FCNR(B) deposits run to maturity at the contracted rate if you wish, and their interest stays exempt while you remain not ordinarily resident.

7. How the accounts are commonly used

• UAE salary and savings that may need to go back abroad: NRE accounts and FCNR(B) deposits are the fully repatriable options; FCNR(B) deposits are held in a foreign currency rather than rupees.
• Rent, dividends, pension or sale proceeds in India: an NRO account is the usual home. Plan the USD 1 million limit for capital amounts, such as sale proceeds and accumulated balances, and the tax forms before you need to remit.
• Currency: NRE and NRO balances are in rupees, and FCNR(B) deposits in a foreign currency. Choosing between them involves interest-rate and exchange-rate considerations that are outside the scope of this note; discuss them with your bank or a SEBI-registered investment adviser.
• If you plan to return to India, the redesignation rules and the RFC option in part 6 above apply from the date your FEMA status changes, so look at your accounts and deposits before you move.

Questions we are asked

Can my parents in India be joint holders? On an NRO account, yes, with residents on a "former or survivor" basis. On an NRE account, a resident relative such as a parent can be a joint holder only on a "former or survivor" basis, and can operate the account during your lifetime only as your power of attorney holder.

Can I deposit Indian rupee cash or cheques from India into my NRE account? Generally no. Local receipts that are not current income belong in the NRO account. Rent and similar current income can go to an NRE account only once the bank is satisfied that tax has been dealt with.

Do I need to file an Indian return just for NRE interest? Not usually. While you meet the FEMA condition, NRE interest is exempt and does not by itself take your income over the filing limit. You may still need to file for other reasons: taxable NRO interest, rent or capital gains, to claim back excess tax, or where one of the other conditions in the law that require a return applies. Our guide to the Indian tax return for NRIs in the UAE covers this.

This note is for general information only. It states the position as on 9 October 2026 and is not legal, tax, financial or investment advice. Exchange control rules, bank procedures and tax rates change; please confirm the current position before acting.

I. H. Khan and Associates
Tax, GST and business setup advisors — Mumbai and Thane. Contact us to discuss your situation.

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