Indian interest and dividends when you are a Japanese tax resident

In India, interest on an NRE account is exempt under Section 10(4) while you hold non-resident status, so India charges nothing and deducts no TDS. NRO interest is taxable, with TDS under Section 195, and Indian dividends are taxable with TDS deducted by the company, both reducible to the treaty rate of 10% if you file a tax residency certificate and Form 10F. So on the Indian side, NRE is untaxed and NRO interest and dividends are taxed at up to 10%.

Whether Japan taxes this income depends first on your resident tier. As a non-permanent resident, a non-Japanese national resident for five years or less, Japan taxes your Indian interest and dividends only to the extent you remit them to Japan. As a permanent resident, over five years, Japan taxes them on its worldwide basis.

The rate is the surprise. People assume investment income in Japan is taxed at the flat rate of about 20%, but that flat rate is for securities handled through Japanese brokers. Foreign interest and Indian dividends received directly in India are generally taxed under Japan's aggregate progressive rates, which run up to 45% plus local inhabitant tax, often much higher than expected. Japan gives a credit for the India tax on the NRO interest and dividends, up to the treaty rate of 10%, but the credit only reduces the Japanese tax; it does not cap it at 10%. And NRE interest, being exempt in India, brings no credit at all, so for a permanent resident it is taxed in full at those Japanese rates. The tax-free NRE account is tax-free only in India.