Is NRE FD interest taxable in India? The short answer
No: interest on an NRE fixed deposit is fully exempt from Indian tax, and the bank deducts zero TDS on it. The exemption sits in Section 10(4)(ii) of the Income-tax Act and holds as long as you qualify as a non-resident under FEMA.
| Account | Indian tax on the interest | TDS the bank deducts | What changes when you move back |
|---|---|---|---|
| NRE | Exempt while you are non-resident under FEMA (Section 10(4)(ii)) | Nil | The account must be redesignated as resident (or moved to an RFC account); interest earned after you become resident is taxable at your slab |
| NRO | Fully taxable | 30% plus surcharge and cess under Section 195, unless you give the bank a TRC and Form 41 (formerly Form 10F) for your treaty rate | Still taxable; once the account is redesignated the bank applies resident TDS rules instead of Section 195 |
| FCNR (B) | Exempt while you are non-resident or resident but not ordinarily resident (Section 10(15)(iv)(fa)) | Nil | Stays exempt through your RNOR years; taxable once you are ordinarily resident |
This page is about the NRE account only. If you also hold an NRO or FCNR deposit, or you aren't sure which one your FD sits in, start with FCNR vs NRE vs NRO, which puts the three side by side.
The one catch is across the border. If your country of residence taxes worldwide income. The US, the UK, most of Europe, Australia, Canada. That interest is still taxable *there*, and because India levied no tax there is no Foreign Tax Credit to offset it. So NRE FD interest is tax-free in India, but not necessarily tax-free for you overall. The rest of this guide is the detail behind both halves of that answer.
What an NRE Fixed Deposit is
An NRE (Non-Resident External) Fixed Deposit is an INR-denominated term deposit funded by foreign-earned remittances sent into India by a non-resident under FEMA. Source-of-funds is the gating rule: only money earned outside India and remitted via the banking channel (or from another NRE account, or sale proceeds of foreign-currency assets credited via FCNR) can fund an NRE FD.
NRE ≠ NRO. NRO holds Indian-source income (rent, dividends, pension); its interest is fully taxable. NRE holds foreign-source funds; its interest is exempt under Section 10(4)(ii) : zero TDS, no Indian tax. Same bank, same INR currency, very different tax treatment.
The deposit is held in INR but the principal can be repatriated freely (no USD 1 million cap that applies to NRO). FEMA permits free repatriation of NRE balances because the funds came from outside India in the first place, FEMA's job is to track inbound/outbound flows and NRE funds are simply going back where they came from.
Section 10(4)(ii): what the exemption actually says
Section 10(4)(ii) of the Income-tax Act exempts: 'in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Management Act, 1999, and the rules made thereunder, provided that such individual is a person resident outside India as defined in clause (w) of Section 2 of the said Act'.
Two conditions must hold simultaneously:
1. The deposit is a valid NRE account under FEMA. If FEMA disqualifies the account (e.g., source-of-funds violation, holder becomes resident under FEMA), the exemption stops.
2. The holder is a 'person resident outside India' under FEMA Section 2(w). This is a different test from Section 6 of the Income-tax Act. FEMA non-residency turns on intent and physical stay (more than 182 days outside India in the preceding FY, OR has gone abroad for employment / business / indefinite stay). Section 6 is a day-count test for income-tax residential status.
The exemption ends the moment you become a person resident in India under FEMA : which can happen even mid-year if you take up an Indian employment / decide to stay. Your existing NRE FD must be re-designated to a resident account; from that moment the interest becomes taxable. Until then, the bank does not deduct TDS (Section 395, formerly Section 197A enforcement).
Eligibility and account-opening rules
Who can hold an NRE FD: any Indian citizen, PIO, or OCI cardholder who is a 'person resident outside India' under FEMA. Both the FEMA non-resident status AND a clean source-of-funds for the deposit are required.
What can fund an NRE FD: • Foreign-currency remittance into India (via SWIFT, banking channels) • Transfer from another NRE / FCNR account • Sale proceeds of foreign-currency assets credited via FCNR • Personal cheques drawn on a foreign bank account (rare in practice)
What cannot fund an NRE FD: • Indian-source income: rent, dividends, pension, sale of Indian property. These must go to NRO. Trying to credit them to NRE is a FEMA violation, and banks will reject. • Cash deposits in India (with limited exceptions for personal allowance up to USD 5000 equivalent on travel) • Funds from another resident's account in India
Joint holdings: NRE accounts can be held jointly with another NR. Per RBI's Master Direction on deposits and accounts, NRIs can also hold NRE accounts jointly with a resident close relative (spouse, parent, child, sibling), on a 'Former or Survivor' basis only; during the NR's lifetime the resident relative can operate it only as a power-of-attorney holder, for local payments and remittances to the NR abroad. The funds remain NRE-tagged.
Premature closure: Allowed at any time without restriction, subject to a small interest-rate haircut (~1%) per the bank's standard FD terms. The exemption is preserved.
TDS: zero, but operationalised via Section 197A
Banks do not deduct TDS on NRE interest. The exemption operates through Section 10(4)(ii) read with Section 395, formerly Section 197A. A self-executing exemption that doesn't require Form 15G / 15H or a Section 197 lower-deduction certificate.
The bank's compliance checklist before NOT deducting TDS:
• Account is correctly tagged NRE in the bank's CBS (core banking system) • Account holder's KYC reflects current FEMA non-resident status (passport, visa, overseas address) • No event has triggered re-designation (return to India, change in residence status)
If any of those break, the bank will start deducting TDS from the next interest credit cycle, either at the resident slab (if account is re-designated) or at 30% Section 195 (if FEMA status is unclear). Both are recoverable via ITR if you can demonstrate continuing FEMA non-resident status, but the friction is real.
The exemption appears in your Form 26AS / AIS as zero TDS against the bank's TAN with the income marked under Section 10. SFT reporting under Section 285BA still happens. The IT department knows you have the FD; it's just exempt.
FEMA repatriation rules: much cleaner than NRO
NRE balances are freely repatriable. No USD 1 million per FY cap. No Form 15CA / 15CB required for outbound transfers from NRE (because there's no taxable income to certify. The interest is exempt). The bank simply executes the SWIFT transfer.
The only gating items: • Bank's internal AML / TBML checks above certain transaction sizes • KYC currency and validity • Beneficiary verification for first-time outbound transfers
Conversion to FCNR: NRE funds can be converted to FCNR (foreign-currency-denominated FD) at the prevailing FX rate. FCNR interest is also exempt (Section 10(15)(iv)(fa)), see the FCNR guide. This is useful if you want to lock in an FX position.
Conversion to RFC on return to India: When you become resident under FEMA, your NRE balance must be re-designated. The cleanest path is to convert to a Resident Foreign Currency (RFC) account, which preserves the foreign-currency flavour during your RNOR window (RFC interest is exempt for RNOR; taxable for ROR). Most banks won't proactively offer this, ask explicitly.
Does your country tax NRE interest? Usually yes, and that is the catch
India exempts NRE interest. Your country of residence usually doesn't. Most countries tax their residents on worldwide income, including Indian deposit interest. Specifically:
United States: NRE interest is fully taxable on Form 1040 Schedule B at ordinary income rates. State tax (CA, NY, NJ) layers on top. There is no Foreign Tax Credit because India levied no tax: the FTC offsets foreign tax paid, and exempt-in-India means zero credit. The US-India DTAA Article 11 (15% interest cap) is irrelevant here because India has unilaterally exempted the income; the treaty caps Indian tax, not US tax. This is the single most-misunderstood thing for American NRIs.
United Kingdom (post-FIG abolition, April 2025): Indian NRE interest is fully taxable on UK Self Assessment under arising basis at up to 45%. No FTC available (same reason). Pre-April 2025, the remittance basis allowed deferral if funds weren't remitted to UK; that's gone now. UK NRIs holding NRE FDs need to declare the interest annually whether or not they remit.
Canada / Australia / EU: Generally fully taxable as worldwide income. FTC unavailable. Some countries (Australia post-departure) have specific rules for former residents.
Gulf states (UAE, Saudi, Bahrain, Kuwait, Oman, Qatar): No personal income tax on Indian NRE interest. Oman is the exception from 1 January 2028, taxing above OMR 42,000. UAE's Corporate Tax 2023 doesn't apply to individual investment income. This is where NRE FDs are genuinely tax-free: both India AND country of residence collect zero.
Singapore / Hong Kong: Singapore exempts foreign-source income unless remitted to Singapore. NRE interest in an NRI's hands typically stays outside Singapore taxation. Hong Kong follows territorial source. Indian-source interest is outside HK tax.
For Gulf, Singapore, Hong Kong NRIs, NRE is the ideal Indian-side parking. For US, UK, Canadian, EU NRIs, NRE is just deferral of taxation; you're paying it elsewhere.
When NRE FDs make sense vs alternatives
NRE FDs win when: • You're a Gulf / Singapore / HK NRI (zero residence-state tax means genuine double-zero) • You want INR exposure with full repatriability (NRO has the USD 1M cap) • You want fixed-tenure interest income at competitive rates (typically 6.5-7.5% for 1-5 year tenures, RBI-capped) • Your time horizon is 3+ years and you're confident on FEMA non-resident status throughout
NRE FDs don't win when: • You're a US / UK NRI: your residence-state taxes the interest fully; the India exemption is a wash. FCNR (foreign-currency) typically has cleaner tax treatment for these holders. • You expect to return to India within 1-2 years, re-designation friction + RNOR-window planning may eat the benefit • You want forex hedge, NRE is INR-denominated, so currency risk is real. FCNR holds USD/GBP/EUR/JPY directly. • You're holding it for the rate alone, bank FCNR USD rates have narrowed the gap; FCNR is comparable for shorter tenures