NRO Fixed Deposits — the complete tax, FEMA and repatriation guide for NRIs

An NRO (Non-Resident Ordinary) Fixed Deposit is an INR-denominated term deposit held by a non-resident Indian (NRI) at an Indian scheduled bank. It is the *only* legal account class in which Indian-source income — rent, dividends, pension, sale proceeds from Indian assets — can be credited to a non-resident.

NRO ≠ NRE. NRE Fixed Deposits hold foreign-earned funds remitted to India and pay tax-free interest under Section 10(4)(ii) of the Income-tax Act. NRO holds Indian-earned funds and the interest is fully taxable in India under the slab rate, withheld at 30% by the bank under Section 195. The tax difference between NRO and NRE is the single most-misunderstood thing about NRI banking.

NRO is mandatory if you have rent, Indian dividends, or Indian salary credits flowing in. It is regulated by FEMA Notification 5(R), 2016 (the master Foreign Exchange Management Regulations on deposits). The interest rate, lock-in and premature-closure rules are set by each bank, but the tax treatment is identical across banks — that's all in the Income-tax Act, not in the deposit contract.

Anyone classified as a non-resident under FEMA — which is a different test from the Section 6 Income-tax Act test — can open and hold an NRO account. The FEMA non-resident definition turns on intent and stay (a person residing outside India for taking up employment, business, or staying abroad indefinitely). The Income-tax non-resident test is the day-count under Section 6.

Three practical groups can hold NRO FDs:

(a) NRIs living abroad with Indian-source income (rent, dividends, pre-NRI-status FD that has been re-designated). All Section 195 TDS applies.

(b) RNORs — returning NRIs in their first 1–3 years post-return who still qualify under Section 6(6). They can keep their NRO accounts; interest is still subject to 30% TDS, but the underlying tax is determined by Section 6(6) rules — foreign income exempt, Indian income taxable.

(c) PIOs / OCIs with Indian-source income. Same treatment as NRIs.

Residents (under FEMA) cannot hold NRO accounts. The day a returning NRI becomes a Resident under FEMA — typically when they stop being employed abroad and have no clear intent to return — the NRO account must be re-designated as a resident account. The bank initiates this; the NRO interest stops, the resident slab rate begins.

When the bank credits NRO interest to your account, it deducts TDS under Section 195 of the Income-tax Act. Section 195 is the catch-all section for any payment to a non-resident; for NRO interest the rate is the rate-in-force prescribed by Schedule I of the Finance Act, which is 30% for interest other than the specific concessional regimes (Sections 194LB / 194LC / 194LD).

The 30% rate is the base. On top of it the bank also deducts:

• 4% Health and Education Cess on the tax — making the effective rate 31.2%.

• Surcharge at 10% / 15% / 25% / 37% if your *total* Indian income crosses ₹50L / ₹1Cr / ₹2Cr / ₹5Cr respectively. The 37% top-tier surcharge applies only under the OLD regime; the new regime caps surcharge at 25% (Finance Act 2023 onward). Banks don't know your total income, so they typically don't apply surcharge at source on standalone FD interest unless you cross the high-value FD reporting thresholds — the surcharge effectively reconciles when you file your ITR.

So for a typical NRI with NRO interest below ₹50L of total Indian income: the bank withholds 31.2% (30% + 4% cess) and that's the at-source figure. Higher-income NRIs face 32.5–35.88% effective at source (old regime) or up to 32.5% under new regime.

Important on the DTAA rate: Most India treaties cap NRO interest at 10–15% (Mauritius 7.5%). The treaty rate is inclusive of cess and surcharge per Section 90(2) — the treaty caps total Indian tax at the headline rate. A UAE NRI's treaty cap is 12.5% — that 12.5% IS the maximum total Indian tax bite, not 12.5% + cess. Some banks incorrectly add cess on top of the treaty rate; the correct position per case law (and CBDT clarifications) is treaty-rate-inclusive. If your bank withholds 13% on UAE-NRI NRO interest claiming "12.5% + cess", you're being over-withheld and the excess is refundable via ITR.

The country-by-country table below shows the headline post-DTAA rate for every country we cover.

The treaty rate doesn't kick in automatically. Until you furnish the right documents, your bank deducts the full 30% (+cess). Three things must be on file:

1. A valid Tax Residency Certificate (TRC) from your country's tax authority for the relevant Indian financial year. UAE's FTA, US IRS Form 6166, UK HMRC Certificate of Residence, Singapore IRAS COR, etc. Each authority has its own process; turnaround ranges from 5 days (UAE) to 12 weeks (US).

2. Form 10F for FY 2025-26 and earlier filings, OR Form 41 from FY 2026-27 onward. Form 41 was notified by CBDT vide Notification G.S.R. 198(E) dated 20 March 2026 under Section 159(8) of the Income-tax Act, 2025 read with Rule 75 of the Income-tax Rules, 2026. Same role as old Form 10F — a self-declaration that you're a tax resident of the other state for treaty purposes.

3. PAN linked to your NRO account.

File Form 10F / Form 41 on incometax.gov.in (it's a 5-minute online form). Submit the acknowledgment + TRC + PAN to your bank. Most banks update their TDS rate from the next interest credit cycle. If they don't, escalate via the bank's NRI desk — most front-line branch officers don't handle treaty rates.

Critical caveat: Bahrain NRIs cannot claim a treaty rate on NRO interest. India and Bahrain have only a Tax Information Exchange Agreement (TIEA) signed 2012 — *not* a comprehensive DTAA. The 30% Section 195 default applies in full for Bahrain residents. Anyone selling you a 'Bahrain DTAA refund' is wrong on the law.

FEMA governs whether and how NRO funds can leave India. Three principal rules:

(a) Current-income repatriability: NRO interest credited in the current year is fully repatriable (after taxes paid) without the USD 1M limit. The bank must permit the outward remittance subject to Form 15CA / 15CB submission for amounts above ₹5 lakh per remittance (Rule 37BB).

(b) USD 1 million per financial year: Capital balances in NRO — including matured FD principal that came from sale of Indian property, inheritance, gifts, or pre-NRI-status accumulations — can be repatriated up to USD 1 million per Indian financial year (April–March) per the FEMA Master Direction on Remittance of Assets. A separate Form 15CA Part C / D and 15CB CA certificate are required for each remittance.

(c) The 'taint' rule: NRO funds that originated from undisclosed sources, or were credited in violation of FEMA, are not repatriable until regularised. This catches cash deposits from real-estate transactions where the source-of-funds documentation is weak. If your AO ever issues a Section 142(1) inquiry on the NRO origin, the FEMA repatriation freezes until cleared.

Forms 15CA + 15CB are the operational gates per Rule 37BB. Part A — remittance ≤ ₹5L per FY, no 15CB needed. Part B — > ₹5L AND chargeable to tax AND an AO order under Section 195(2)/(3) or 197 has been obtained (the AO certificate replaces the CA certificate). Part C — > ₹5L AND chargeable to tax AND no AO order in place; requires Form 15CB (CA-certified determination of taxability). Part D — remittance NOT chargeable to tax under the Income-tax Act (e.g., personal-exempt remittances, certain capital remittances genuinely outside the source rule). Most NRO interest repatriations after TDS has been deducted go via Part C with Form 15CB.

Holding an NRO FD does not, by itself, trigger any India-side reporting beyond your standard ITR. The bank reports your interest credits to the income-tax department via Section 285BA Statement of Financial Transactions (SFT) — appearing in your Form 26AS / AIS automatically. You don't separately file anything in India for the FD existence.

Schedule FA in your ITR-2 (Indian disclosure of foreign assets): ONLY required if you are a Resident and Ordinarily Resident (ROR) — i.e., RNOR years are exempt per ITR-2 instructions. NRIs do not file Schedule FA at all.

FBAR (FinCEN 114) for US persons: If you are a US citizen, green-card holder, or US tax resident, your aggregate foreign accounts crossing $10,000 at any point in the year triggers FBAR. The NRO FD counts. Penalty for willful non-filing for CY 2026 is the greater of $165,353 or 50% of the account balance per violation (FinCEN inflation adjustment, 17 Jan 2025).

Form 8938 (FATCA) for US persons: Layered on top of FBAR. Thresholds for NRIs living abroad: $200K end-of-year / $300K at any time (single), $400K / $600K (joint). Different form, different threshold; both still required.

CRS reporting: The Indian bank reports your NRO account to your country of residence's tax authority (UK HMRC, Australian ATO, etc.) under the Common Reporting Standard. You don't file anything; the data flow happens government-to-government. Most NRIs first hear about it via an HMRC nudge letter or equivalent.

Best for: • Gulf-resident NRIs (UAE, Oman, Saudi, Kuwait, Qatar, Mauritius) where the home country has zero or low PIT — the post-treaty 7.5–12.5% Indian rate is the *only* tax bite. • NRIs receiving recurring Indian-source income (rent, dividends, pension) that legally must land in NRO. • Returning NRIs in RNOR years who want INR-denominated yield without re-designating to resident.

Reduce exposure if you're: • A US NRI with no specific reason to hold NRO. Your post-DTAA rate is 15% in India *plus* full ordinary-income taxation in the US. State tax (CA, NY, NJ) layers further. You typically end up with negative real return after currency drift. • A UK NRI post-FIG abolition (April 2025). Indian-source NRO interest is now UK-taxable on arising basis at up to 45%, with FTC for the 15% Indian withholding. Net 30% after FTC. Compare carefully against a UK ISA or premium bonds. • A Bahrain NRI. The 30% Section 195 default applies in full (no DTAA). NRO FDs are pure tax drag; consider FCNR (which is exempt under Section 10(15)(iv)(fa) regardless of treaty status) instead.

Watch out for: • Joint accounts with a resident family member. Section 195 still applies to the NR holder's share but bank systems sometimes default to resident TDS rates — verify your Form 26AS / AIS quarterly. • Premature closure penalties — typically 0.5–1% on the rate for breaking before maturity. For a 7% NRO FD broken in year 2 of a 5-year term, that's a real return hit.

If your bank deducted 30% on past NRO interest while a treaty rate of 10–15% was available, the excess is recoverable. Two paths:

Current year: File ITR-2 claiming the treaty rate. The Indian Income Tax Department refunds the difference, typically 4–8 months after assessment, with Section 244A(1)(aa) interest at 6% p.a. simple from the date of TDS deposit.

Past 5 years: CBDT Circular 11/2024 (effective 1 October 2024) lets you file a Section 119(2)(b) condonation application for refund claims up to 5 years from the end of the relevant Assessment Year. From FY 2026-27 (today) the practical reach is FY 2020-21 onward — about 6 past financial years of recovery in one filing window.

For a typical UAE NRI with ₹25L in NRO FDs at 7% interest for 5 past years: ~₹1.75L of annual interest, 17.5% gap (30% default - 12.5% treaty), recoverable principal ~₹1.5L plus Section 244A interest ~₹25k. Closer to ₹1.75L total recovery in one consolidated claim.

This is the core of TrustNRI's recovery service — happy to walk through your specific numbers in a free 15-minute CA consultation.