NRE and NRO interest when you are a Canadian tax resident

Interest on an NRE account is exempt in India under Section 10(4) while you hold non-resident status, and the Indian bank deducts no tax. Inside India that is accurate, and it is where the tax-free reputation comes from.

Canada does not recognise it. A Canadian resident is taxed on worldwide income, so the NRE interest is fully taxable in Canada at your rates, reported in Canadian dollars. And because India levied no tax on it, there is no foreign tax to credit against the Canadian charge, unlike taxed income, which brings a credit. So the tax-free NRE interest is taxed in full in Canada with nothing to soften it. People holding large NRE deposits in the belief the interest is genuinely tax-free are regularly and expensively caught out.

NRO interest is taxable in India. The bank deducts TDS under Section 195 at about 31% by default, but the India-Canada treaty caps the tax on interest at 15%, which you get by filing a tax residency certificate and Form 10F with the bank before the interest is paid. Canada then taxes the NRO interest too, and gives a foreign tax credit for the India tax, up to that 15%.

The 15% matters for a Canadian reason: the credit for this kind of foreign income is itself limited to 15% of the income, so if the bank over-deducted at 31% because you had not filed Form 10F, Canada credits only 15% and the extra has to be reclaimed from India, not from Canada. Filing Form 10F up front keeps the two aligned. Separately, if the cost of your NRE and NRO deposits together is more than CAD 100,000, you must report them each year on Form T1135, the Foreign Income Verification Statement, whose penalties are steep.