NRE and NRO interest when you are a UK tax resident

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

The UK does not recognise it. A UK resident is taxed on worldwide income, so the NRE interest is UK-taxable foreign savings income, at your UK rates. And because India levied no tax on it, there is no foreign tax to credit against the UK charge, unlike taxed income, which brings a credit. The UK Personal Savings Allowance shelters only the first £1,000 for a basic-rate taxpayer, £500 for a higher-rate one and nothing for an additional-rate one, so on any meaningful NRE balance the interest is taxed in full. People holding large NRE deposits in the belief the interest is genuinely tax-free are regularly caught out.

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

This produces the counter-intuitive result worth understanding. On NRO interest, the UK gives you a 15% credit against its tax. On NRE interest, the UK gives the full charge with no credit at all, because India took nothing. So for a UK resident, the tax-free NRE account can end up more expensive than a taxable NRO one. If the bank over-deducted the NRO interest at 31% because no Form 10F was filed, the UK still only credits 15%, and the extra is reclaimed from India, not the UK. Filing Form 10F up front keeps it aligned.