Interest earned by NRIs is treated differently depending on the type of bank account, with NRE and FCNR deposits generally enjoying tax exemptions in India
PRAVASISAMWAD.COM
Non-Resident Indians (NRIs) earning interest on bank deposits in India need to understand the different tax rules applying to NRE, NRO and FCNR accounts. The tax treatment depends largely on the nature of the account and the holder’s residential status.
Interest earned on a Non-Resident External (NRE) account is exempt from income tax in India, provided the account holder meets the eligibility conditions under the Foreign Exchange Management Act (FEMA). The Income Tax Department has confirmed that this exemption has been retained under the Income Tax Act, 2025.
FCNR (Foreign Currency Non-Resident) deposits also offer tax-free interest in India for eligible non-residents. The deposits are maintained in specified foreign currencies, helping NRIs avoid currency conversion risk on the principal and interest while the deposit remains in foreign currency. The Income Tax Department also treats qualifying FCNR interest as exempt for tax purposes.
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The position is different for Non-Resident Ordinary (NRO) accounts, which are generally used to manage income earned in India, such as rent, pension or dividends
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Interest earned on an NRO account is taxable in India. Banks generally deduct tax at source at 30 per cent, along with applicable surcharge and cess, although a lower rate may be available under a Double Taxation Avoidance Agreement (DTAA), subject to the required documentation
The distinction is important for NRIs choosing where to hold their Indian income or overseas earnings. Tax obligations in the country where an NRI lives may also apply, even when interest is exempt in India.
The latest guidance therefore reinforces a simple rule: NRE and eligible FCNR interest can remain tax-exempt in India, while NRO interest is taxable, making account selection an important part of NRI financial planning.
