Recycling rare-earth elements from Nd magnet scrap (Nd–Fe–B scrap) is a highly economical process; however, its efficiency is low due to large portions of Fe impurity. In this study, the effective separation of Fe impurity from scrap was performed through an integrated nitric acid dissolution and hydrothermal route with the addition of fructose. Results showed that more than 99% of the scrap was dissolved in nitric acid, and after three dilutions that the Nd, Pr, Dy and Fe concentrations in the diluted acid were 9.01, 2.11, 0.37 and 10.53 g/L, respectively. After the acid was hydrothermally treated in the absence of fructose, only 81.8% Fe was removed as irregular hematite aggregates, whilst more than 98% rare-earth elements were retained. By adding fructose at an Mfructose/Mnitrate ratio of 0.2, 99.94% Fe was precipitated as hematite nanoparticles, and the loss of rare-earth elements was <2%. In the treated acid, the residual Fe was 6.3 mg/L, whilst Nd, Pr and Dy were 8.84, 2.07 and 0.36 g/L, respectively. Such composition was conducive for further recycling of high-purity rare-earth products with low Fe impurity. The generated hematite nanoparticles contained 67.92% Fe with a rare-earth element content of <1%. This value meets the general standard for commercial hematite active pharmaceutical ingredients. In this manner, a green process was developed for separating Fe from Nd–Fe–B scrap without producing secondary waste.