Short answer: NRE and FCNR interest is exempt while you are non-resident. NRO interest is taxable and deducted at source. The exemption attaches to your status, not to the account — which is why a return to India changes the answer without anything visible happening at the bank.
| What it holds | Interest |
|---|
| NRE | Funds remitted from abroad, in rupees | Exempt while non-resident |
| NRO | Income arising in India — rent, dividends, pension | Taxable, TDS at source |
| FCNR | Deposits held in foreign currency | Exempt while non-resident or RNOR |
The distinction that matters operationally is not the tax rate. It is what belongs in which account. Indian-source income belongs in NRO. Money you send from abroad belongs in NRE. Mixing them is easy and the consequences surface much later, when you try to take money out and are asked to demonstrate what it was and whether it was taxed.
Interest on an NRE account is exempt — Section 10(4)(ii) under the 1961 Act, carried into the Income-tax Act 2025 through Section 11 read with Schedule IV, serial 1.
Read the condition rather than the headline. The exemption is available because of who you are, not because of what the account is called. The account is a facility for a person resident outside India; when that ceases to be true, the exemption ceases with it.
Nothing announces this. The bank does not send a letter on the day your status changes, and the interest keeps being credited exactly as before.
Interest on an NRO account is Indian-source income and tax is deducted when it is credited, at the rate applicable to a non-resident. That rate is materially higher than what a resident would face on the same interest.
Two things follow that people miss:
- A treaty rate is not automatic. Where a treaty with your country of residence provides a lower rate on interest, claiming it requires a residency certificate and the treaty form, given to the payer before deduction. Otherwise the higher rate applies and the difference has to be reclaimed through a return.
- Deduction is not the end of it. TDS is a payment on account. If your total Indian income sits below the threshold, or the treaty rate was lower, the excess comes back only if you file.
Interest on an FCNR deposit is exempt — Section 10(15)(iv)(fa) under the 1961 Act, carried into Schedule IV, serial 14, of the 2025 Act.
The two entries are drafted differently, and it matters when you go looking for the conditions. Serial 1 states the NRE exemption itself. Serial 14 does not: it exempts income falling under a list of 1961 Act provisions — 10(6A), (6B), (6BB), (15A), (15)(iiia), (iiib), (iiic), (iv)(a), (b) and (fa) — “subject to the conditions as specified therein.” For FCNR, in other words, the 2025 Act points back at the 1961 Act rather than replacing it. Guidance that treats the old section as repealed from 1 April 2026 has the mechanism wrong.
FCNR behaves better than NRE on a return, because the exemption is generally available while you are a non-resident or an RNOR rather than ending on arrival. For someone returning with foreign currency deposits, that difference is worth understanding before the deposits mature rather than after.
This is the part worth planning, and it has nothing to do with the bank noticing.
- The NRE exemption stops. The account is redesignated; the interest becomes taxable.
- FCNR may continue exempt through the RNOR period.
- An RFC account — Resident Foreign Currency — lets a returning resident continue holding foreign currency rather than being forced to convert on arrival. It is the natural destination for an FCNR balance. Whether the interest on it is exempt turns on your residential status for income-tax purposes in the year concerned, which is a question to settle before the transfer.
The wider point is that a return to India is a tax event spread across several accounts at once, and the window in which it can be planned closes on the date you arrive. That window — RNOR — is covered separately in the RNOR window.
- Check what is going into which account. Indian income into NRO, remitted funds into NRE.
- Check whether a treaty rate should be reducing the TDS on your NRO interest, and whether the payer has what it needs to apply it.
- If a return to India is in prospect, establish your likely residential status for the year of return before you fix the arrival date.
- If you are repatriating, the tax history of the funds is what you will be asked for — see when a repatriation actually needs a CA certificate.
This is a working reference, not the statute. Exemptions and rates for non-residents are confirmed against the current provision before being relied on.