The exemption depends on your FEMA status, not your tax status
The tax-free nature of NRE interest is not automatic or permanent. Under Section 10(4)(ii), which moves to Schedule IV of the Income-tax Act 2025 with the same conditions, interest on an NRE account is exempt only for a person who is resident outside India under FEMA.
That last point trips people up. The exemption hangs on your FEMA residential status, which is about where you live and intend to stay, not on the day-count test that decides your income-tax residency. You can be treated one way for income tax and another under FEMA. When your FEMA status shifts to resident, the NRE exemption ends from that point, even if the account still says NRE on paper.
The three real reasons a bank deducts TDS on NRE interest
You have returned to India and are now a FEMA resident. This is the most common genuine cause. Once you come back to settle, you become resident under FEMA, and your NRE interest stops being exempt. The account is meant to be redesignated to a resident account (or an RFC account), and until it is, or once the bank knows, TDS starts.
The account status was not updated. If your KYC or residency flag with the bank is stale or has been changed, the bank may deduct where it should not, or fail to stop when it should. This is a records problem to correct with the branch.
It is actually an NRO account. NRE and NRO look similar and people mix them up. NRO interest is taxable and carries TDS for a non-resident at 30% plus surcharge and cess under Section 195 (renumbered Section 393). If the deduction is on an NRO balance, it is correct, and the question becomes whether a tax treaty lets you lower it.
Bank error is the fourth, rarer possibility. If none of the first three fit and you were genuinely non-resident throughout, the deduction is likely a mistake to reclaim.
When exactly the exemption stops for a returning NRI
This is the subtle part, and the rules are not fully settled. FEMA defines a person resident in India in Section 2(v). One limb is the 182-days test based on the prior year. But there is a second limb: someone who comes to India for employment, business, or in circumstances that show an intention to stay for an uncertain period becomes resident from the day they arrive, with no 182-day wait.
On the mainstream RBI reading, a person returning to settle permanently is a FEMA resident from the date of return, so NRE interest stops being exempt from that day and the account should be redesignated promptly. Note that a tax tribunal has taken a stricter view in at least one case, holding that 182 days of actual presence are still needed before FEMA residency flips. Because the position can be argued both ways, the safe course for a returnee is to treat yourself as resident from your return, redesignate the account, and take advice rather than assume the exemption simply continues.
How to reclaim TDS wrongly deducted on exempt NRE interest
If you were genuinely resident outside India and the interest was exempt, deducted TDS is not lost. You file an Indian income-tax return, report the NRE interest as exempt, and claim the deducted TDS back as a refund. The refund carries interest under Section 244A at 0.5% a month, roughly 6% a year, from the relevant date.
Before assuming it is an error, check the three causes above, because if your FEMA status did change, the right step is not a refund claim but fixing the account and reporting the now-taxable interest. Getting that call right avoids a larger problem later, when a mismatch between an NRE label and a resident reality can draw questions.