For Non-Resident Indians (NRIs), the choice between an NRE (Non-Resident External) and NRO (Non-Resident Ordinary) account has major implications. The biggest difference:

  • NRE interest is tax-free in India.
  • NRO interest is taxable at ~31.2% TDS (30% + surcharge + 4% cess).

Statutory rules quoted (Section 10(4)(ii), Section 195, USD 1M repatriation, Form 15CA/15CB) are established RBI + IT Act provisions. DTAA rates and 2026 interest rates - verify with your bank + cross-border tax advisor.

Quick Comparison Table

FeatureNRENRO
Source of FundsForeign earnings onlyIndia-sourced income + foreign remittances
Tax on Interest in IndiaFully exempt (Sec 10(4)(ii))Fully taxable
TDS on InterestNil~31.2% under Sec 195
DTAA BenefitNot applicableReduce TDS to 10-15% with TRC + Form 10F
RepatriationFully free - no limitUSD 1 million/FY (after tax clearance)
CurrencyINRINR
Joint HoldingOnly NRI/OCICan include resident Indian
Best UseForeign savings, tax-free + free repatriationIndia-sourced income (rent, dividends, pension)

1. NRE - Maximum Tax Advantage

  • Interest 100% tax-free in India, no TDS
  • ₹50 lakh NRE FD at 7% = ₹3.5 lakh interest, all yours
  • Home country (US, UK, Canada, Australia) may still tax worldwide interest income

2. NRO - Taxable with High Withholding

  • Interest fully taxable in India
  • Banks deduct TDS ~31.2% under Section 195
  • ₹50 lakh at 7% = ₹3.5 lakh interest → TDS ~₹1.09 lakh → net ~₹2.41 lakh
  • Reduce via DTAA: submit TRC + Form 10F for 10-15% rate
  • File ITR-2 for refund if actual liability < TDS

Practical Example (2026)

USD 10,000 (~₹9.4 lakh) at 7%, 1 year:

  • NRE FD: Gross ~USD 700, India tax USD 0, Net USD 700
  • NRO FD: Gross ~₹65,800, TDS ~₹20,530 (31.2%), Net ~USD 481

Savings: ~USD 219/year per USD 10,000. Compounded over decades = significant.

Approximate DTAA Rates on Interest

  • USA / UK / Canada / Singapore / Australia: 15%
  • UAE: ~12.5%
  • Germany / Netherlands: ~10%

Verify current DTAA schedule at incometax.gov.in.

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Important Rules

  • Indian income MUST go to NRO - depositing to NRE = FEMA violation
  • NRO to NRE transfer allowed, counts toward USD 1M cap, needs Form 15CA + 15CB (or updated 145/146 per 2026 CBDT circular)
  • On permanent return, redesignate NRE/NRO as resident accounts
  • NRE only joint with NRI/OCI; NRO can include resident spouse/parent

US-Based NRIs

  • Report Indian bank accounts on FBAR (FinCEN 114) if aggregate exceeds USD 10,000
  • Report on Form 8938 (FATCA) if thresholds met
  • Claim Foreign Tax Credit (Form 1116) for TDS on NRO income
  • NRE tax-free in India, still US-taxable

FAQ

Is NRE interest completely tax-free?

Yes - Section 10(4)(ii). No TDS in India. Home-country tax may apply.

What is TDS on NRO interest?

~31.2% under Section 195. Reducible to 10-15% via DTAA (TRC + Form 10F).

Can I transfer NRO to NRE?

Yes, subject to USD 1M annual cap + tax clearance forms.

Can NRE be joint with resident spouse?

No. NRE = both holders NRI/OCI. NRO can include resident.

What happens on permanent return to India?

Redesignate to resident accounts. NRE interest becomes taxable from status change date.

Bottom Line

Routing foreign earnings into NRE saves 30%+ India tax on interest every year. Use NRO only for genuine India-source income. Explore more NRI investment guides.

Disclaimer: Informational only. Consult qualified CA + cross-border tax advisor.