Are you an NRI who wants to earn attractive interest by opening a fixed deposit account in India? If yes, you have multiple options to choose from. There are several banks with attractive fixed deposit schemes for NRIs, like NRE, NRO, and FCNR. Some of the deposits, like NRE and FCNR, are tax-free on interest earned. 

But the interests you earned on NRO are tax payable. So you should understand the applicable tax on FD interest for NRI. 

Quick Overview: NRE vs NRO vs FCNR 

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How India Taxes FD Interest for NRIs 

NRE and FCNR come with zero tax on FD interest for NRIs. NROs are subject to tax deducted at source ( TDS) of 30% with the applicable fees and surcharge. This TDS percentage can be lower if the country you live in has a DTAA agreement with India. 

As per Section 206AA introduced by the Finance (No. 2) Act, 2009, an NRI who deducts their TDS on interest should submit their PAN to the deductor. If the investors do not adhere to these NRI FD tax rules, then TDS will be the higher of the maximum marginal rate or 30% with applicable surcharge and fees.

NRE FDs: Tax-free While You Remain NRI 

NRE FD interest is tax-free in India for non-resident Indians. No TDS is applicable to investors. NRE FD rates vary from bank to bank. The rates also vary as per the tenure of the FD.  

For example, some banks provide 5% for the same tenure. Currently, the NRE fixed deposit rate ranges between 4.50% and 6.75%, depending on the basis of bank and tenure. Interest becomes taxable for investors after they return to India.  

NRO FDs: TDS Rates and Surcharge Bands 

For NRI, the TDS on FD interest under NRO account is 30%, with the additional surcharge and health and education cess of 4%. The surcharge is variable and increases when your income increases. Let us look at the NRO FD tax rate below.

If NRI investors don’t have PAN, then banks will deduct the higher TDS, as per the ICICI Bank and HDFC Bank NRO TDS guidelines.

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FCNR FDs: Foreign-Currency Deposits and Tax Treatment 

Foreign Currency Non-Resident (FCNR) is also tax-free in India for NRI Investors. It allows you to hold designated foreign currency earnings in India and earn interest for a fixed period in foreign-denominated currency. The interest earned and principal amount are freely repatriated back in foreign currency. 

DTAA and TRC: How NRIs Reduce Withholding on FD Interest 

NRIs can avail the DTAA benefits to tax their interests at less TDS. For example:

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To reduce the overall tax on FD interest for NRI and avail such benefits, you should follow the given steps. 

• Get a tax residency certificate ( TRC) from your resident country 

• Fill form 10F if TRC lacks details 

• Share the visa, passport, PAN, address proof and TRC + form 10F with your bank.

• Then, the banks apply the reduced DTAA rate, usually at 10-15%, on the basis of the country.

The tax rate on NRI FD interest is evaluated by Indian tax laws, but it varies on the basis of DTAA and the country of residence that the NRI has with India.

Example

Let us understand with an example, Smriti, a Canada-based NRI with an NRO account, can earn 25 lakh interest in India. On this, TDS was deducted at 31.2%. Although her overall tax liability may differ as per Indian tax slabs, the TDS on her income will be deducted strictly as per applicable DTAA provisions.

 Under the India-Canada DTAA, a shareholder can claim the 15% reduced tax rate on NRO interest and file their Indian return. 

It allows her to claim a refund of 16.2%. She can also claim a foreign tax credit in Canada on the NRI FD interest tax she paid in India.

Compliance: NRO Limits, 15CA/15CB and RBI Cap

Repatriating NRO FD interest to your international account follows the RBI’s Liberalised Remittance Scheme rules. NRIs can remit up to USD 1 million per financial year through an NRO account. If an NRI wants to remit money more than the limit, then there is a requirement to fulfil for RBI approvals 

• Form 15CA (online declaration on Income Tax portal)

• For 15CB ( issued by CA to confirm tax compliance ) 

• PAN, passport, and NRO account details 

Conclusion

Understanding tax on FD interest for NRI helps you to optimise your compliance and income. Fixed deposits for NRIs are a secure investment, and give guaranteed returns and multiple benefits. NRE/FCNR fixed deposits provide you with tax-free interest and free repatriation. NRO FD attracts more taxes, but provides you with repatriation up to $1 million in a financial year. 

Explore multiple options of fixed deposits for NRIs. Download the Rupeeflo app today!

FAQs

1. How are NRIs taxed in India?

The NRIs are taxed in India on the basis of the account they opened. NRE FD and FNCR FD are tax-free, but the NRO fixed deposits are tax payable. 

2. Is NRI FD tax-free?

No, all the NRI fixed deposits are not tax-free. The tax treatment is based on the type of deposit. For example, the NRE FD is tax-free, and the principal amount and interest earned are fully exempt from income tax. NRO is taxable in India, and interest is subject to TDS at applicable rates.

3. How to avoid TDS on NRO FD?

You can reduce the TDS on NRO fixed deposits by getting benefits under the Double Taxation Avoidance Agreement (DTAA) between India and your country of residence.

4. Can I avoid the 30% TDS on NRO FD interest?

Yes, you can avoid the 30% TDS on NRO FD interest by submitting the form 10F, TRC, PAN and identity proofs and applying for DTAA rates. With these steps, banks deduct your tax at lower treaty rates and reduce it from 30% to 15%,  based on the country.