NRI Income Tax Compliance

FD Interest Taxation for NRIs: Things You Need to Know

Updated on: May 26, 202612 mins Editorial Standards

Fixed deposits (FDs) are not only popular among Indian residents, but also the most preferred investment choice among NRIs. FDs offer multiple options to select from. Additionally, several banks in India offer attractive fixed deposit schemes, including NRE, NRO, and FCNR.

However, one common question that arises among investors is the FD interest taxation for NRIs. It completely depends on the type of NRI FD you hold. Some of the deposits, like NRE and FCNR, offer tax-free interest, but the interest earned on NRO FDs is taxable.

Considering this, before investing, you need to understand the applicable tax on FD interest for NRIs. Want to know more about FD interest taxation for NRIs in detail? This blog will provide you with the same.

Key Takeaways

NRI FDs are safe and secure investment options for NRIs planning to invest in India.
There are three different types of NRI FDs, i.e., NRE FDs, NRO FDs, and FCNR FDs.
The interest earned on NRE and FCNR FDs is tax-free in India and allows full repatriation without any limits.
The interest on NRO FDs is subject to 30% TDs. Additionally, you can repatriate USD 1 million per financial year through an NRO account.
The DTAA agreement between India and the country of residency helps in reducing the TDS rate on NRO FDs. Further, to claim the DTAA benefits, you need to submit TRC, Form 10, PAN card, passport, and NRO bank account details.

Types of NRI Fixed Deposits: A Quick Overview

NRIs can invest in three types of fixed deposit accounts in India:

Non-Resident External (NRE) Fixed Deposits (FDs)
Non-Resident Ordinary (NRO) Fixed Deposits (FDs)
Foreign Currency Non-Resident (FCNR) Fixed Deposits (FDs)

The table below provides an overview of these NRE FDs:

Parameters	Non-Resident External (NRE) FDs	Non-Resident Ordinary (NRO) FDs	Foreign-Currency Non-Resident (FCNR) FDs
Deposit Currency	Indian Rupee	Indian Rupee	British Pound US Dollar Euro Australian Dollar Canadian Dollar Japanese Yen
Withdrawal Currency	Indian Rupee	Indian Rupee	British Pound US Dollar Euro Australian Dollar Canadian Dollar Japanese Yen
Interest Earned	Tax-free	Taxable in India	Tax-free
Repatriation	Freely repatriable	Allowed up to $1 million per financial year	Freely repatriable
Tenure	1 to 10 years	Across different banks, the tenure period generally varies between 7 days and 10 years for standard deposits. However, like domestic FDs, RBI offers similar flexibility in NRO FDs.	1 to 5 years

This was an overview of the different types of FDs available in India for NRI investments. Moving ahead, let's see how tax is imposed on the earned interest on these FDs.

How India Imposes Tax on FD Interest for NRI?

The tax implications of NRI FDs depend on the FD type you hold. Considering this, NRE and FCNR FDs have zero tax on FD interest for NRIs. In contrast, NRO FDs are subject to 30% tax deducted at source (TDS) with applicable fees and surcharge. Here, the TDS percentage can be lower if the residence country of an NRI has a DTAA agreement with India.

Additionally, according to section 206AA introduced by the Finance (No. 2) Act, 2009, an NRI who is liable for TDS deduction needs to submit their PAN card to the deductor. In case they do not have PAN and not follow NRI FD tax rules, they face TDS, the higher of the maximum marginal rate or 30%, with applicable fees and surcharge.

NRE FDs: Tax-free While You Remain NRI

As mentioned above, NRE FDs for NRIs are tax-free in India. Considering this, no TDS is deducted on the NRE FD interest. Additionally, the interest rates on NRE FDs vary from bank to bank and as per the tenure of the FD.

For instance, depending on the bank and tenure, the NRE fixed deposit rate ranges between 4.50% to 6.75%. Apart from these, the interest earned on these FDs becomes taxable after NRIs return to India.

NRO FDs: TDS Rates and Surcharge Bands

For NRIs holding NRO FDs, 30% TDS deduction is applied on the interest earned on the FDs with the additional surcharge and 4% health & education cess. Here, as per the variable and increase in your income, the surcharge rate also increases. To provide you with an idea, the table below showcases the NRO FD tax rate in India:

Total Earned Interest	NRO Tax Rate
Less than or equal to INR 50 Lakh	31.2% (30% TDS + 0% Surcharge + 4% Cess)
Between INR 50 Lakh and INR 1 Crore	34.32% (30% TDS + 10% Surcharge + 4% Cess)
Between INR 1 Crore and INR 2 Crore	35.88% (30% TDS + 15% Surcharge + 4% Cess)
Between INR 2 Crore and INR 5 Crore	39% (30% TDS + 25% Surcharge + 4% Cess)
Beyond INR 5 Crore (Old Tax Regime)	42.74% (30% TDS + 25% Surcharge + 4% Cess)

Additionally, as per the HDFC Bank and ICICI Bank NRO TDS guidelines, if NRI investors do not have a PAN card, then higher TDS is deducted.

FCNR FDs: Foreign-Currency Deposits and Tax Treatments

Foreign Currency Non-Resident (FCNR) for NRIs is also tax-free in India. It allows NRIs to hold designated foreign currency earnings in India and earn interest for a fixed period in foreign-denominated currency. Considering this, the earned interest and principal amount are freely repatriated back in foreign currency.

This was all about how India imposes tax on FD interest for NRIs. Moving further, let's know the role of the DTAA agreement and TRC in reducing the withholding on NRI FD interest.

Role of DTAA Agreement and TRC in Reducing the Withholding on NRI FD Interest

The Double Taxation Avoidance Agreement (DTAA) signed between India and the country of residence of NRIs reduces the TDS rate on NRO FDs for NRIs. For instance:

Nature of Income	TDS Rate Without DTAA	TDS Rate with DTAA (Varies by Country)
Interest on NRO FD	30%	10% to 15%

Further, to reduce the NRO FD tax rate for NRI and avail the DTAA benefits, you need to follow the given steps:

Obtain a tax residency certificate (TRC) from your resident country.
Fill Form 10F if there is a lack of details in TRC.
Share the visa, PAN card, passport, address proof, and TRC + Form 10F with your bank.
The bank applies the reduced DTAA rate based on your resident country, generally 10% to 15%.

Further, the Indian tax laws evaluate the tax rate on NRI FD. However, the tax rate on NRO FD also varies on the basis of DTAA and the country of residence that the NRIs have with India.

Moving forward, let's better understand this with an example.

Example

Mr. A, a US-based NRI with an NRO FD account, earns INR 25,00,000 interest in India. On this, 31.2% TDS is deducted. Here, the overall tax liability of Mr. A, as per the Indian tax slabs, is different. However, the TDS on his interest income will be deducted as per the DTAA provision.

Considering this, under the India-USA DTAA, an individual can claim 15% reduced tax rate on NRO interest and file their Indian tax return. It allows Mr. A to claim a tax refund of 16.2%. Additionally, he can also claim a tax credit in the USA on the NRO FD interest tax he paid in India.

Furthermore, let's know the compliance that NRIs need to follow when repatriating NRO FD interest overseas.

Compliance: NRO Limits, 15CA/15CB and RBI Cap

When repatriating NRO FD interest to the overseas bank accounts, NRIs need to follow the Foreign Exchange Management Act (FEMA) rules of the RBI. Considering this, NRIs are allowed to remit funds up to USD 1 million per financial year through their NRO account. In case they want to remit more money, they need to take RBI approvals. Additionally, need to submit the following documents:

Form 15CA (online declaration on Income Tax e-filing portal)
Form 15CB (issued by CA to confirm tax compliance)
PAN card, passport, and details of NRO accounts

These are the compliance requirements NRIs need to follow during NRO FD interest repatriation.

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Final Thoughts

Lastly, before investing, understanding FD interest taxation for NRIs is vital. It helps them to optimize their income and compliance. With NRE/ FCNR fixed deposits, NRIs get tax-free interest and free repatriation. In contrast, NRO FD interest attracts taxes; however, it allows fund repatriation up to US 1 million per financial year to NRIs.

Furthermore, if you still have doubts and are confused about which NRI FD account you should choose, connect with Savetaxs. Our financial experts will provide you with end-to-end assistance and help you select the right NRI FD as per your investment goals and time horizon. You can contact us anytime; we are 24/7 available to assist you.

Glossary

Double Taxation Avoidance Agreement (DTAA): DTAA, an Agreement Signed Between the Countries to Avoid Double Taxation.
Income Tax: Income Tax, a Type of Direct Tax, is Imposed by the Government on the Income of Individuals or Organisations.
Income Tax Act: Income Tax Act, an Act to Manage and Govern the Direct Taxes, by Levying, Collecting, and Administering.
Income Tax Return: Income Tax Return, Filed by Taxpayers, Contains a Formal Record of the Collected Tax by the Government.
Tax Deducted at Source (TDS): The Full form of TDS is Tax Deducted at Source, which is a way to collect the income tax.
Tax Residency Certificate: A Tax residency certificate (TRC) is a document that is issued to prove the individual's residence in the following financial year.

Disclaimer

Note: This guide is for information purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult either a CA, CS, CPA or a professional tax expert from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.

About Author

Hatim Dudhiyawala Certified Public Accountant (CPA)

Hatim Dudhiyawala is a Certified Public Accountant (CPA) with SaveTaxs and specializes in Indian and NRI taxation. He advises individuals, NRIs, and businesses on income tax filing, capital gains taxation, DTAA benefits, fund repatriation, and tax compliance. With experience in cross-border tax matters, Hatim helps taxpayers understand complex regulations and make informed decisions. Through his articles, he shares practical insights to help readers stay compliant and manage their tax obligations with confidence. See Full Bio

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Frequently Asked Questions

The NRIs are taxed in India as per the bank account they hold. Considering this, NRE FD and FCNR FD are tax-free with full repatriation, but NRO FDs are subject to 30% TDS and have repatriation limits.

No, not all the NRI FDs are tax-free in India. The tax treatment is based on the deposit type. For instance, NRE FDs are completely tax-free. Additionally, you are not liable to pay income tax on the principal amount and the earned interest on it. In contrast, NRI FDs are taxable in India, and on the interest earned, TDS is deducted at applicable rates.

You cannot avoid paying TDS on NRO FDs, but you can reduce the TDS rate on them by getting benefits under the Double Taxation Avoidance Agreement (DTAA) between India and your country of residence. It allows you to claim refunds on the paid taxes or reduce the tax rate.

Yes, you can avoid the 30% TDS on NRO FD interest. For this, you need to submit the Form 10F, TRC, PAN card, and identity proof (passport). Additionally, apply for the DTAA rates. With these steps, you bank deduct tax at lower treaty rates (from 30% to 15%) depending on your country of residence.