Who can lend to whom, and on what terms
FEMA permits personal loans in both directions between an NRI and a resident, but the conditions differ by direction, and they were updated in early 2026, so check the date on any advice you read.
When a resident lends to an NRI who is a close relative, the loan must be interest-free, for a minimum of one year, and within the resident's Liberalised Remittance Scheme limit of USD 250,000 per financial year. The money must go into the NRI's NRO account and move through banking channels, not cash, and it cannot be used for a few barred purposes such as agricultural or plantation activity, real-estate business, chit funds or re-lending. When an NRI lends to a resident, the loan is in rupees on a non-repatriable basis, meaning both interest and principal can be repaid only into the NRI lender's NRO account, funded from inward remittance or the NRI's NRE, NRO or FCNR account, again with end-use bars. The important recent change: the old conditions that capped such loans at three years and pegged interest to no more than two per cent over the bank rate were removed by a February 2026 amendment. Almost every article online still shows those caps, so do not rely on them.
The tax on the interest, and the gift trap
Interest on the loan is income in the lender's hands. When the NRI is the lender, the interest is Indian-source income, so the resident borrower must deduct TDS under Section 195 at the rate in force, reduced by the treaty rate if the NRI provides a tax residency certificate and Form 41, formerly Form 10F. If the treaty rate is lower, the NRI can obtain a lower-tax certificate, Form 128, formerly Form 13, so the borrower does not over-deduct. When a resident lends interest-free to an NRI, there is no interest and so no income to tax.
Two traps are worth naming. First, an interest-free loan between relatives is not a taxable gift, because a loan carries a repayment obligation, so it is not money received without consideration. But if the loan is later waived or written off, the forgiven amount can become a gift and be taxed under Section 56(2)(x), unless the lender and borrower are relatives as the section defines them, in which case it stays exempt. Second, the clubbing rule under Section 64 does not apply to a genuine loan, unlike an outright gift to a spouse or minor, where the income the gifted money earns is clubbed back with the giver. To keep both traps shut, treat the loan as a real loan: a written agreement, a genuine intention to repay, and money moving only through banking channels. A practising CA sets the loan up FEMA-compliantly and gets the TDS and documentation right.