Last reviewed: 25 September 2026. Three accounts sit in almost every NRI's banking kit, and their interest is taxed three different ways: NRO interest is fully taxable in India with TDS at 30%-plus, NRE interest is exempt while you qualify, and FCNR interest is exempt while you are non-resident or RNOR. The expensive mistakes happen at the edges: money parked in the wrong account, treaty relief never claimed on NRO, and the year you move back, when the exemptions switch off. Section references below are to the Income-tax Act, 2025, which applies from tax year 2026-27 (old 1961 Act sections in brackets); interest earned up to 31 March 2026 is still governed by the 1961 Act.
The comparison that settles arguments
| Feature | NRO | NRE | FCNR(B) |
|---|---|---|---|
| What goes in | Indian income: rent, dividends, redemptions, sale proceeds | Foreign earnings remitted in | Foreign currency term deposits |
| Interest taxable in India? | Yes, fully | No, while you are resident outside India under FEMA (Schedule IV, S.No. 1, read with s.11; old 10(4)(ii)) | No while you are non-resident or RNOR; yes once you are ROR, even before maturity |
| TDS | ~31.2% under s.393(2) (old 195), no threshold; treaty rate with TRC + Form 10F (s.159(8)(a)/(b), old 90(4)/(5)) | None while exempt | None while exempt |
| Repatriation | Limited: USD 1 million route per FY with 15CA/CB | Free, principal and interest | Free, principal and interest |
| Currency risk | INR | INR | None, held in foreign currency |
The NRO trap, and the two fixes
Every rupee of NRO interest is taxable, and the bank deducts at the domestic non-resident rate with no threshold. The bank-interest threshold in our TDS rate finder protects residents, not you. Fix one is the treaty route: a TRC plus e-filed Form 10F handed to the bank brings many treaty rates to 10 to 15% at source. Both documents must cover the specific tax year for which the lower rate is claimed, so renew them every April (the full drill is in our DTAA guide). Fix two is the return: where your total Indian income sits below taxable limits or the slab rate is below the deduction, the ITR recovers the excess. Where you know in advance that your Indian income is low, a lower-deduction certificate under section 395(1)(a) (old 197) stops the excess at source. Filing also keeps the refund cycle and residency documentation clean year on year.
Worked example: Rs 5 lakh of NRO interest, tax year 2026-27
Take an NRI living in the UAE whose only Indian income is Rs 5,00,000 of NRO fixed-deposit interest, taxed under the default new regime (slab rates for tax year 2026-27 are the same as for FY 2025-26; the section 156 rebate (old 87A) is for residents only, so it does not apply). The India-UAE treaty caps tax on interest at 12.5% of the gross amount for a non-bank recipient.
| Item | No paperwork | TRC + Form 10F given to bank |
|---|---|---|
| TDS rate at source | 31.2% (30% + 4% cess) | 12.5% (treaty rate) |
| TDS deducted | Rs 1,56,000 | Rs 62,500 |
| Tax on slab basis (5% on Rs 1,00,000 above Rs 4 lakh, + 4% cess) | Rs 5,200 | Rs 5,200 |
| Refund claimed through the ITR | Rs 1,50,800 | Rs 57,300 |
The final tax is the same in both columns, since the return taxes you at the lower of the Act and the treaty. What changes is how much of your money sits with the department until the refund arrives, typically months after you file. A UK resident works the same way, except the treaty rate on interest is 15% for a non-bank recipient, and any Indian tax actually suffered is then credited against UK tax on the same interest. Where Indian income is this low, a lower-deduction certificate is usually better than the treaty route alone.
The year you move back to India
- Tell the bank. Once you are resident under FEMA, NRE/NRO accounts are redesignated to resident accounts (NRE typically to resident or RFC). The exemption on NRE interest follows FEMA status, not the account label, and continuing an exempt claim after returning is a classic notice trigger.
- Use RNOR deliberately. Resident but Not Ordinarily Resident status (available for the transition years subject to conditions) keeps most foreign income out of Indian tax, and FCNR interest stays exempt while you are RNOR. FEMA lets an FCNR deposit run to maturity after you return, but from the year you become ROR the interest is taxable even if the deposit has not matured. Match maturities to the RNOR window rather than assuming tax-free interest until maturity.
- Recalendar everything. Schedule FA disclosure begins when you become resident and hold foreign assets. Our Schedule FA guide for returning residents covers how it is matched against AIS and CRS data.
Common mistakes
- Parking India-sourced money in NRE by transfer gymnastics: a FEMA violation waiting for a question.
- Paying 31.2% on NRO interest for years when the treaty said 12.5 to 15%: the most common overpayment we see.
- Using last year's TRC or Form 10F for this year's interest: the bank or the processing unit can deny the treaty rate.
- Leaving accounts un-redesignated after returning: exemption claims that stopped being true.
- Treating FCNR interest as tax-free until maturity after you have become ROR.
- Skipping the ITR because "TDS is already cut", and abandoning refunds every year.
Frequently asked questions
Is NRO account interest taxable in India?
Yes, fully, whatever the amount. The bank deducts TDS at the non-resident rate (30% plus cess, surcharge where applicable) under section 393(2) of the Income-tax Act, 2025 (old section 195), with no threshold. A treaty rate can apply at source with a TRC and e-filed Form 10F covering that tax year, and any excess deduction is recoverable through the ITR.
Is NRE fixed deposit interest really tax-free?
Yes, while you qualify as a person resident outside India under FEMA. The exemption now sits in Schedule IV, S.No. 1, read with section 11 of the Income-tax Act, 2025 (old section 10(4)(ii)), and attaches to that status. Once you return and become resident under FEMA, the account must be redesignated and the exemption ends.
What happens to FCNR interest when I return to India?
The income-tax exemption applies only while you are non-resident or Resident but Not Ordinarily Resident (RNOR). FEMA lets the deposit run to maturity after you return, but once you become Resident and Ordinarily Resident (ROR) the interest is taxable, even if the deposit has not matured. Plan maturities so that as much interest as possible accrues within the RNOR years.
Can I lower the 30% TDS on my NRO interest?
Often, yes. Give your bank a TRC and an e-filed Form 10F that cover the relevant tax year, and it can deduct at your treaty's interest-article rate (commonly 10 to 15%). Set it up at the start of each year; it does not apply retrospectively to interest already paid. Where your total Indian income is low, a lower-deduction certificate under section 395(1)(a) (old section 197) is the other route.
Do I need to file an ITR if TDS is already deducted?
Usually it pays to. The flat deduction frequently exceeds the true liability (slab rates, treaty rates), and only the return recovers the difference. It also keeps the residency and disclosure record that later certificates, refunds and repatriations depend on.
How does the firm help NRIs with account taxation?
We map the accounts to FEMA status, set up treaty relief at source with the bank, file the ITRs with refunds and disclosures aligned, plan the return-to-India transition (redesignation, RNOR years, FCNR maturities), and certify repatriations under 15CA/15CB, working with you across time zones.
We align your NRO/NRE/FCNR setup with FEMA and the treaty, stop the silent 30% overpayment, and plan the return-to-India transition properly.
NRI Lower TDS Certificate Income Tax Filing Talk to us CA for NRIsThis article is general information as on 25 September 2026. Exemptions attach to FEMA residential status and bank-account designation; treaty rates vary by country and by recipient. Surcharge applies above income thresholds. Form numbers for 15CA/15CB and Form 10F may change under the Income-tax Rules, 2026; check the current form on the e-filing portal. Not professional advice; positions depend on facts and current law.