What the tax-sparing credit is
Normally you only get a foreign tax credit for tax you actually paid abroad. A tax-sparing clause is an exception: it lets your home country give credit for tax the other country chose not to charge, usually to preserve the value of an incentive.
The India-UK treaty has one, in Article 24. It says the Indian tax you are treated as having paid includes tax that would have been charged but for certain listed Indian exemptions, and the exemption for NRE-account interest, under Section 10(4) of the Indian law, is one of those listed. So even though India took no tax on your NRE interest, the UK can, in principle, give you a credit as if India had taxed it, which reduces your UK tax on the same interest.
How much, and the fifteen percent cap
The credit is not unlimited. It is based on the Indian tax that would have applied to the interest but for the exemption, and under the treaty India's tax on interest paid to a UK resident is capped at 15%. So the deemed credit is worked out at up to 15% of the interest, and it is then limited again to the actual UK tax on that interest, whichever is lower.
In practice, for a basic-rate UK taxpayer the UK tax may be below 15%, so the credit can wipe out the UK tax on the interest; for a higher-rate taxpayer the 15% cap bites and some UK tax remains. Either way it is a real reduction, when it is available.
The ten-year limit, which often ends it
The important limit is time. The treaty only allows the tax-sparing credit for income arising within about ten fiscal years of when the exemption was first granted for that source. After that, your NRE interest stays exempt in India but the UK gives no credit and taxes it in full.
For many NRIs this window has already closed, because the NRE account and its exemption have been running for well over ten years. So the first thing to check is not whether the clause exists, which it does, but whether your ten years are still open. If they are not, the credit is simply not available, however the interest is taxed.
Why you should take advice before relying on it
Two things make this a matter for care rather than a simple claim. It is genuinely unsettled whether HMRC gives the credit on interest that was fully exempt, like NRE interest, rather than interest that bore some Indian tax that was then relieved, so a claim on exempt NRE interest can be questioned. And a common suggestion, that moving the money into a new NRE account restarts the ten-year clock, is not supported by the treaty, which ties the limit to the source of the income rather than the account, so treating a fresh account as a reset is a risk, not a technique.
The position can also differ for FCNR interest, which is exempt in India under a different provision than NRE, so do not assume the same tax-sparing treatment carries across. The honest position is that the credit is real and worth checking, especially if your NRE account is relatively recent, but whether it helps you, and how to claim it safely, is a UK-side question worth taking to a specialist. We give you the Indian facts, the exemption and the interest figures, that a UK adviser needs to make the call.