NRE and NRO interest when you are a German 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. That is the whole basis of the tax-free reputation, and inside India it is right.

Germany does not recognise it. A German resident is taxed on worldwide income, and interest is specifically a kind of income the treaty allows Germany to tax while giving a credit for any India tax. So the NRE interest is taxed in Germany at the flat 25% tax on capital income plus the 5.5% solidarity surcharge on that tax, about 26.375% in all, and any church tax. Because India levied nothing, there is no India tax to credit, so you bear the full German charge. The saver's allowance, €1,000 for a single person or €2,000 for a married couple, is set against your capital income first, but beyond that the NRE interest is taxed in full.

NRO interest is taxable in India. The bank deducts TDS under Section 195 at about 31% by default, but the India-Germany treaty caps the tax on interest at 10%, which you get by filing a tax residency certificate and Form 10F with the bank before the interest is paid. Germany then taxes the NRO interest at its flat rate too, and credits the 10% India tax, so the double tax on NRO interest is largely relieved.

One practical point applies to both accounts: the Indian bank does not withhold German tax, so unlike a German bank account, this interest is not settled at source. You must declare it yourself on the capital-income part of your German return. Leaving foreign interest off the German return is a common and risky omission, because the German tax office increasingly receives account information internationally. So the NRE interest in particular has to be actively reported, since nobody withholds it for you and it is fully taxable.