Many NRIs desire to send money, help their family, or invest in India via loans. However, the loan from an NRI to a resident Indian or an Indian company is the one that is regulated under FEMA and RBI guidelines. This guide covers the essential laws, permitted channels, interest caps, taxation norms, and compliance procedures for a smooth and legal loan transaction.

Legal Basis and the Rules You Must Know (FEMA / RBI / Notifications)

All NRI giving loans to Indian resident transactions are subject to the provisions of the Foreign Exchange Management Act (FEMA) 1999 and the RBI’s Master Directions issued thereunder. It is the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, which outline who can borrow and lend, what currency is allowed, and what reporting requirements exist.

The RBI’s Master Direction on Borrowing and Lending in Foreign Exchange and Rupees details the channels (authorised banks), eligible accounts, repayment methods, and the maturity or interest specs.

Loans To Resident Individuals: Permitted Routes and Practical Rules

If you are going to extend a loan from NRI to resident Indian, it should comply with the FEMA and RBI regulations.

1. Permitted Inbound Channels

Funds may be transferred only through:

• Inward remittance by normal banking channels, or

• Deposited to the borrower’s NRO account, or

• As per the loan agreement.

Under FEMA, lending transactions between an NRI and a resident must be routed through normal banking channels (e.g., inward remittance, NRO/NRE/FCNR accounts) and cannot be informal/cash transactions.

  2. Currency Options:

Loans can be in:

• Indian Rupees (INR) - this is the most common; or

• Foreign currency - In foreign currency, a resident Indian may borrow up to USD 250,000 (or such amount as specified by RBI from time to time) from an NRI relative outside India, subject to RBI conditions on use, maturity, and repatriation; this limit is prescribed under the Foreign Exchange Management (Borrowing and Lending) Regulations and related FEMA rules.

3. Term and interest:

• Tenure: up to 3 years as per RBI guidance on borrowing in Indian Rupees from NRIs; any specific minimum maturity requirement should be confirmed with the authorised dealer bank and current RBI directions. 

• Interest: It must be reasonable with respect to the market rate.

4. Repayment:

Repayment of loans by a resident Indian to an NRI must be through normal banking channels and credited to the NRI’s designated rupee/non-resident account; repatriation outside India is subject to FEMA/Remittance of Assets rules (e.g., USD 1 million NRO cap per year).

Loans To Indian Companies and Firms - Stricter Rules and Typical Permitted Structures

NRI Loans to Indian companies are highly regulated under FEMA. You can’t just send money to a company in India and call it a “loan.”

Direct Loans: Indian companies can receive direct loans in Indian rupees from NRIs under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 subject to RBI permissions and compliance; ECBs and NCDs apply where the borrowings are treated as foreign capital/debt instruments under FEMA.

End-Use Restrictions: 

INR vs. Foreign Currency Borrowing 

• Repayment on a repatriation basis: An Indian company can receive loans from an NRI under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, and may also raise debt through ECB or issuance of NCDs under ECB/foreign investment rules; specific conditions, end-use restrictions, reporting, and compliance must be followed as per RBI and FEMA guidelines.

• Non- repatriation: the repayment has to be non-repatriable. 

For example, an NRI giving a loan to an Indian company cannot lend ₹1 crore directly to a private company;  he has to take the approved ECB or NCD route and report to the RBI.

Which Bank Account to Use: NRE Vs NRO Vs FCNR (And Repatriation Impact)

Selecting the right bank account is important when granting a loan from an NRI to a resident  Indian.

In practice,  loan proceeds are generally credited by banks to the borrower's NRO account, unless the terms of the loan provide otherwise.

Interest, Tenure and Rate Limits: What You Can Charge and Where to Check Current Caps

Under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, interest on rupee loans between NRIs and resident Indians is not arbitrarily set but subject to RBI permission and regulatory compliance. The limit may be revised, so please verify the applicable bank rate and RBI Master Directions before fixing terms.

For loans by NRIs to Indian companies, if structured as External Commercial Borrowings (ECBs) or other foreign currency debt instruments, interest ceilings and terms are governed by RBI’s ECB directions; purely rupee-denominated loans must comply with RBI conditions, including reasonable interest linked to RBI-declared benchmarks where applicable.

The interest income is taxable in India, and there could be TDS on the same, so check for yield on a post-tax basis and withholding before you go ahead.

Tax Treatment for the NRI Lender and TDS Obligations for the Borrower or Company

An NRI’s interest income from India is assessable under the Indian Income Tax law.

• TDS for Borrowers: When a resident/Indian Company pays interest to NRI, the income is taxable, and TDS is compulsorily deductible under section 195 of the Income Tax Act. The remitter has to submit Form 15CA (declaration of remittance), and the Form 15CB (certificate from a Chartered Accountant stating tax has been deducted) has to be obtained.

• PAN Requirement: In case the NRI is not in possession of a valid PAN, the rates of TDS specified under Rule 206AA shall be applied.

• DTAA Relief: NRIs may avail the benefit of the Double Taxation Avoidance Act (DTAA) so that tax paid outside of India can be utilised to either reduce or claim a refund on tax. Get a tax return filed in India and talk to a tax adviser to claim treaty relief.

Practical Flow:

Borrower deducts TDS → obtains Form 15CB → files Form 15CA → remits interest → NRI reports income in Indian return. 

Common Mistakes to Avoid

Many NRIs end up breaching FEMA regulations unknowingly because of minor oversights.

Here are some of the biggest red flags:

• Using informal channels or cash transfers - Not Compliant Under FEMA. Always route your funds through AD Category-I banks.

• Not mentioning repayment terms - Banks can refuse the remittance if they are not told the source of repayment (NRE/NRO/FCNR).

• Disregarding TDS/Form 15CA/15CB – This would result in a penalty and delay in remittance.

• Lending to a firm without ascertaining the permitted route Could attract FEMA violation fines.

Non-compliance under FEMA can be penalised up to three times the sum involved. Rectify by applying to the RBI for compounding of contraventions if needed.

Conclusion

A loan from an NRI to a resident Indian or an NRI loan to an Indian company is perfectly legal - but only if you are on the right side of the rulebook.

Transact through authorised banking channels, adhere to the applicable FEMA and RBI Master Directions, maintain proper documentation for all transactions, and TDS is to be complied with. When done properly, these loans allow the NRIs to safely help out family or make investments in India, without getting caught in regulatory traps.

Want to simplify lending for your close relatives or Indian companies in India? Download Rupeeflo for custom NRI banking services. 

FAQs

1. Can an NRI give a loan to a resident Indian directly?

Yes, but as per RBI guidelines, it should be routed through the inward remittance or the borrower’s NRO account.

2. Can an NRI give a loan to an Indian company?

Through permitted routes like NCDs or the ECB route. There are restrictions on direct loans.

3. What is the limit for loans to relatives in India?

Borrowing up to USD 250,000 from a close relative for specified purposes is allowed under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 and related FEMA rules

4. Is the interest on NRI loans taxable in India?

Yes. The borrower is required to withhold TDS u/s 195 before making payment of interest to an NRI lender.