NRE vs NRO Fixed Deposit Interest: How the Tax Treatment Actually Works | RebaseNest

✍️ RebaseNest Team · Last updated 21 Jun 2026

·12 min read
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Assuming you are an NRI or an OCI cardholder with a salary in dollars, pounds, or dirhams, and you have parked part of your savings in Indian fixed deposits. Some of that money lives in an NRE FD because the rupee yields are higher than what your home-country bank offers, and some lives in an NRO FD because that is where the rent from your Pune flat lands. The two accounts look similar on a bank statement. The tax treatment is not similar at all. The headline difference is the one most NRIs already know: NRE interest is tax-free, NRO interest is taxed at 30%. The mechanics behind that headline, and what changes when residency status changes, is where the actual money sits.

1. What the two account types are, in one paragraph

NRE (Non-Resident External) is a rupee account that a person resident outside India under FEMA is permitted to fund with foreign earnings, with full repatriability of principal and interest. NRO (Non-Resident Ordinary) is a rupee account a non-resident uses for India-source receipts (rent, dividends, pension, sale proceeds), with limited repatriation under the USD 1 million per financial year window. FCNR(B) is a separate foreign-currency term deposit, governed by the same RBI Master Direction. The eligibility for all of these flows from the holder's FEMA residential status, not the income-tax status.

2. The tax treatment, side by side

Account     Interest taxable in India?              TDS at source (NR holder)
NRE SB/FD   Exempt under Section 10(4)(ii)          Nil
NRO SB/FD   Taxable at slab rates                   30% + surcharge + cess under Section 195
FCNR(B) FD  Exempt under Section 10(15)(iv)(fa)*    Nil
RFC SB/FD   Exempt while RNOR; taxable thereafter   Per applicable rules

*Section 10(15)(iv)(fa) exempts interest payable by a scheduled bank to a non-resident or a person who is not ordinarily resident, on deposits in foreign currency where acceptance of such deposits is approved by RBI. FCNR(B) deposits are the standard example.

The asymmetry is the design point of the regime. The state wants foreign-currency inflows into the banking system, so the NRE and FCNR(B) windows are tax-advantaged. NRO is the catch-all for India-source income that a non-resident needs to receive and use in India, and it is taxed like any other India-source receipt, at slab rates, with TDS at source.

3. Why NRE FD interest is tax-free: the statutory anchor

Section 10(4)(ii) of the Income-tax Act, 1961 reads, in substance, that in the case of an individual, interest on money standing to the individual's credit in a Non-Resident (External) Account is not included in total income, provided the individual is a person resident outside India as defined in Section 2(w) of FEMA, or is a person who has been permitted by the Reserve Bank of India to maintain the account. The exemption rides on the holder's eligibility status and on the account being an NRE account. Strip either condition and the exemption falls away.

The most common place this matters is the year of return. The flat in Bangalore is ready, the school admission has come through, and the H1B has been allowed to lapse. On the day the FEMA status flips to resident under Section 2(v)(B), the NRE eligibility is gone, even if the bank has not yet processed the redesignation request. Interest accruing in that gap is in a zone that needs CA review, not a self-serve assumption that "the FD term is still running so it must still be tax-free." Section 10(4)(ii) is anchored to status, not to the term of the deposit.

4. Why NRO FD interest is taxed at 30%: Section 195 and the surcharge stack

NRO interest is not exempt. It is taxable in India as income from other sources at the applicable slab rate. The withholding is at 30% under Section 195 of the Income-tax Act read with Part II of the First Schedule to the relevant Finance Act, with surcharge and cess on top. The full effective rate for an NRO interest payment to a non-resident, before any treaty relief, can be calculated as base 30% × (1 + applicable surcharge rate) × 1.04 for cess. At the no-surcharge band the effective rate is roughly 31.2%. At the 25% surcharge band (income over ₹2Cr) it climbs to roughly 39%.

Two things to note about the surcharge interaction. Old regime surcharge runs at 10%, 15%, 25%, and 37% at income thresholds of ₹50L, ₹1Cr, ₹2Cr, and ₹5Cr respectively. New regime surcharge runs at 10%, 15%, and 25% at income thresholds of ₹50L, ₹1Cr, and ₹2Cr respectively, with the 25% rate as the cap above ₹2Cr. The 15% surcharge cap that applies to LTCG under Section 112A, STCG under Section 111A, and dividend income under both regimes does not extend to interest income. Interest is taxed at the full applicable surcharge ladder in each regime. Operational handling of TDS at source varies by bank; the statutory rate and the final tax position are settled under the Act and in the return.

5. The DTAA route: how Article 11 caps NRO TDS

Where a Double Taxation Avoidance Agreement is in place between India and the country of residence, the source-country withholding rate on interest is typically capped lower than the domestic 30%. Article 11(2) of the India-US DTAA caps the source-country rate on interest at 15% of the gross amount in the general case, and at 10% of the gross amount where the interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company). The India-UK and several other DTAAs follow similar (though not identical) structures. The mechanism is Section 90 of the Income-tax Act, which gives the treaty rate effect over the domestic rate to the extent the treaty is more beneficial to the taxpayer.

Claiming the treaty rate at source requires the payee to put the bank in a position to apply it. The standard documentary stack is a current Tax Residency Certificate (TRC) issued by the residence-country tax authority under Section 90(4), Form 10F under Section 90(5) where the TRC does not contain the particulars prescribed under Rule 21AB (status, PAN if allotted, nationality or country of incorporation or registration, TIN or unique ID, the residential-status period covered, and address), and the bank's internal customer-declaration form. Form 10F is now filed electronically on the income-tax e-filing portal. Without that stack the bank will deduct at the full domestic rate; any excess deducted has to be claimed back in the return.

A separate route is the Section 197 lower-deduction certificate. The non-resident payee (or their tax representative) applies in Form 13 to the jurisdictional Assessing Officer; the AO issues a certificate specifying a lower or nil withholding rate. The certificate is the payee's instrument, not the payer's. Banks operating NRO accounts will deduct at the certified rate once the certificate is on file. Form 15CA and Form 15CB (the remittance-reporting forms under Section 195(6) and Rule 37BB) are not substitutes for the Section 197 certificate.

6. Why Form 15G and Form 15H are not the answer for an NRI

A common reflex when interest TDS feels punitive is to file Form 15G or Form 15H to stop the deduction. Both forms are self-declarations under Section 197A of the Income-tax Act, available only to residents. Form 15G is for a resident individual (other than a senior citizen) subject to the prescribed nil-tax and threshold conditions; Form 15H is for a resident senior citizen whose tax on estimated total income for the year is nil. The opening words of Section 197A ("resident in India") are the gate. A non-resident is not eligible for either. Filing Form 15G as a non-resident is a compliance error, not a planning route, and any TDS that should have been deducted remains the bank's responsibility to recover.

For an NRI the only routes to a lower or nil TDS on NRO interest are the DTAA mechanism described in section 5 and the Section 197 lower-deduction certificate. There is no resident-equivalent self-declaration form available to a non-resident, by statutory design.

7. The FEMA residency test that anchors everything

The eligibility for NRE/NRO/FCNR(B), and the application of Section 10(4)(ii) to NRE interest, both depend on whether the account holder is a person resident outside India under FEMA. FEMA Section 2(v) and the mirror Section 2(w) define the test by reference to physical presence and intent. A person is treated as resident in India under Section 2(v)(A) if they were in India for more than 182 days in the preceding financial year, subject to specified exceptions, including travel out of India for the purpose of taking up employment, business, or vocation. Section 2(v)(B) brings within "resident in India" a person who has come to India for any of those purposes or for any other purpose indicating an intention to stay for an uncertain period. The Income-tax Act residency test in Section 6 is similar in shape but uses different thresholds and a different intent test; the two should not be conflated.

The practical implication is that the FEMA status flip on return can happen before any change in the income-tax residential status for that financial year. The bank's NRE redesignation trigger is the FEMA flip. The Section 10(4)(ii) exemption falls away with the same flip. RNOR status under Section 6(6) of the Income-tax Act may continue for one to two years after return and governs what income India can tax, but it does not extend the NRE exemption beyond the FEMA flip.

8. Common misreadings of NRE vs NRO

A few framings that circulate but the statute does not support:

  • "NRE FD interest is tax-free for all NRIs forever." The exemption is conditional on FEMA-non-resident status of the holder. It is not a permanent attribute of the deposit.
  • "NRO TDS at 30% is the final tax." It is the withholding rate. The actual tax is at slab rates; refunds are possible if slab tax is lower than TDS, and additional tax is payable if slab tax is higher.
  • "Form 15G stops TDS on my NRO FD interest." Not available to non-residents.
  • "DTAA relief is automatic." It requires the documentary stack described above to be in place at source; without it, the bank deducts at the full domestic rate and the payee chases a refund.
  • "Filing Form 15CB with the bank substitutes for the lower-rate certificate." Form 15CA/15CB is the remittance-reporting mechanism; it does not authorise a lower withholding rate.

9. The structural takeaway

NRE and NRO are not parallel products with a tax tier-break. They are FEMA-defined accounts that exist for different cash-flow purposes (foreign earnings parked in rupees versus India-source receipts handled in rupees), and the tax treatment is downstream of that purpose. The Section 10(4)(ii) exemption on NRE interest is the state's standing offer for foreign-currency inflows into the banking system. The 30% TDS on NRO interest is the state taxing India-source income at the rate it taxes any other India-source receipt to a non-resident, with DTAA relief available where a treaty is in place.

The investor best placed to use the NRE side is the one whose foreign-currency earnings are routed to it cleanly and whose FEMA status is genuinely non-resident under Section 2(w). The investor best placed to optimise the NRO side is the one with a current TRC, a filed Form 10F, and either a treaty rate or a Section 197 certificate sitting at the bank before the interest accrual date, not after.

A note on what this is. This article is one returnee's working notes, not personalised advice. Numbers age. Rules change. The only person who can sign off on your specific case is a qualified cross-border chartered accountant looking at your full facts. Use this as a checklist of questions to take to that conversation, not as the answer.

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