Residency for tax purposes and residency for foreign-exchange purposes run on different clocks, and NRIs planning a permanent move back to India often track only the tax one -- the 182-day test, RNOR status, and so on. But FEMA (the Foreign Exchange Management Act) has its own residency rule, and it flips the moment someone returns to India with the intention of staying, not at the end of a tax year. That flip carries an immediate, practical consequence: NRE and NRO accounts are structured for non-residents, and once FEMA treats the holder as resident, those account types are no longer the correct ones to operate.
NRE accounts: redesignate or move to RFC
RBI's rules for accounts held by persons resident outside India are direct on this point, using the word 'immediately': on return for permanent settlement, an NRE account should be redesignated as a resident rupee account, or its funds transferred into an eligible Resident Foreign Currency (RFC) account. There's no fixed number of days written into the regulation itself, but banks treat 'immediately' as a prompt obligation rather than something to defer until convenient -- continuing to operate an NRE account after FEMA residency has changed is a FEMA violation, not a paperwork oversight.
Existing NRE term deposits get a practical accommodation: banks generally allow them to run to their original maturity at the contracted interest rate rather than forcing an immediate premature closure, and RBI rules specifically permit no-penalty conversion of an NRE deposit into an RFC account. Once matured, the principal and interest move into either a resident rupee account or an RFC account, depending on the account holder's eligibility and preference.
NRO accounts: a simpler redesignation
NRO accounts have a shorter story because the tax treatment barely changes -- NRO interest was already taxable in India before the return, and it remains taxable afterward. The bank simply redesignates the NRO account as an ordinary resident savings or current account. There's no RFC option here, since NRO accounts hold rupee funds rather than foreign currency, and no equivalent maturity-runout complexity beyond what any resident term deposit would have.
RFC accounts and the RNOR window
RFC accounts exist specifically for this transition -- a resident account that can still be maintained in foreign currency, with no repatriation restriction, intended for returning NRIs to hold foreign-currency savings and NRE/FCNR proceeds without forcing an immediate rupee conversion. Their tax treatment tracks residency status closely: interest earned on an RFC account is exempt from Indian tax under Section 10(15)(iv)(fa) of the Income-tax Act for as long as the account holder remains RNOR (Resident but Not Ordinarily Resident), but becomes fully taxable at slab rates once that person becomes an ordinary tax resident (ROR) -- typically two to three years after return, depending on their prior years of NRI status.
FCNR(B) deposits sit slightly apart from this: an existing FCNR(B) deposit can generally continue to maturity at its contracted rate even after the holder becomes FEMA-resident, with the interest earned during that remaining term still following NRI/RNOR-linked exemption treatment. Once it matures, the same choice applies -- move it into a resident rupee account or an RFC account.