Published 9 May 2026
Tax exemption on interest under section 10(4)(ii) of the Income-tax Act, 1961, the Foreign Currency Non-Resident account, the rupees one million per year repatriation cap on Non-Resident Ordinary funds, Tax Deducted at Source rates and the Double Taxation Avoidance Agreement reduction route
Taxpayer Brief
Every Non-Resident Indian opens a Non-Resident Ordinary or Non-Resident External (or both) account on becoming Non-Resident -- but the tax treatment of the two could not be more different. Interest on a Non-Resident External account is fully exempt from Indian income-tax under clause (4)(ii) of section 10 of the Income-tax Act, 1961; interest on a Non-Resident Ordinary account is fully taxable, with Tax Deducted at Source at thirty per cent plus surcharge plus four per cent Health and Education Cess. The Foreign Currency Non-Resident deposit, in turn, enjoys exemption under clause (15)(iv) of section 10. This article walks through the three account types, the tax framework, the repatriation regime under the Foreign Exchange Management Act, 1999, and the Double Taxation Avoidance Agreement route to lower withholding.
1. The Three Non-Resident Account Types
Account Type | Currency | Source of Funds | Repatriability |
|---|---|---|---|
Non-Resident External Account | Indian Rupees | Foreign earnings remitted from abroad | Both principal and interest fully repatriable to foreign country |
Non-Resident Ordinary Account | Indian Rupees | Indian-source income (rent, dividend, capital gain) and inward remittance | Up to United States Dollar one million per financial year (Reserve Bank of India Liberalised Remittance Scheme equivalent for outward); interest fully repatriable |
Foreign Currency Non-Resident Account | Foreign currency (United States Dollar / British Pound / Euro / Japanese Yen / Australian Dollar / Canadian Dollar / Singapore Dollar / Hong Kong Dollar) | Foreign currency remittance from abroad | Both principal and interest fully repatriable |
2. Tax Treatment of Interest
Account | Statutory Exemption / Charge | Tax Deducted at Source Rate | Where Reported in the Return |
|---|---|---|---|
Non-Resident External | Interest fully exempt under clause (4)(ii) of section 10 of the Income-tax Act, 1961 | Nil | Schedule EI -- Exempt Income |
Non-Resident Ordinary | Interest fully taxable under section 56 as Income from Other Sources | 30% plus surcharge plus 4% Health and Education Cess (effective 31.2% to 39.0% depending on slab); section 195 read with First Schedule | Schedule OS |
Foreign Currency Non-Resident | Interest fully exempt under sub-clause (iv) of clause (15) of section 10 | Nil | Schedule EI |
Resident Foreign Currency (post return to India) | Taxable as Resident interest income; specific Reserve Bank of India scheme rules apply | Per section 194A standard rates | Schedule OS |
Why the difference The Non-Resident External and Foreign Currency Non-Resident exemptions exist to encourage Non-Resident Indians to remit foreign earnings to India -- the deposit gives the country foreign-currency reserves and the depositor receives competitive interest rates. The Non-Resident Ordinary account, by contrast, holds Indian-source income that has already arisen in India -- there is no remittance incentive, so the standard charge applies. |
3. Tax Deducted at Source on Non-Resident Ordinary Interest
Section 195 of the Income-tax Act, 1961 requires every payer of interest to a Non-Resident to deduct Tax Deducted at Source at the rate prescribed under the First Schedule to the Finance Act for the relevant year. For Non-Resident Ordinary interest, the rate is 30%, plus the applicable surcharge, plus 4% Health and Education Cess. The aggregate effective rate ranges from 31.2% (no surcharge) to 39.0% (37% surcharge bracket for total Indian income above rupees five crore) -- though the surcharge cap on Non-Resident dividend / interest was rationalised by the Finance Act, 2023 to 15%.
Total Indian Income Bracket | Surcharge | Effective Tax Deducted at Source Rate (30% + Surcharge + 4% Cess) |
|---|---|---|
Up to rupees fifty lakh | Nil | 31.2% |
Rupees fifty lakh to one crore | 10% | 34.32% |
Rupees one crore to two crore | 15% | 35.88% |
Above rupees two crore (Non-Resident interest -- capped per Finance Act, 2023) | 15% | 35.88% |
4. Reducing the Tax Deducted at Source Through Double Taxation Avoidance Agreement
Where the Non-Resident Indian's country of residence has a Double Taxation Avoidance Agreement with India, the agreement typically prescribes a lower withholding rate on interest -- generally 10%, 12.5% or 15% depending on the treaty. The Non-Resident Indian can avail of the lower rate by furnishing two documents to the bank (the deductor) -- a Tax Residency Certificate from the foreign country, and a Form 10F self-declaration. The bank then deducts at the treaty rate.
Country of Residence | Treaty Rate on Interest under Double Taxation Avoidance Agreement | Saving over Default 31.2% |
|---|---|---|
United States | 15% | 16.2 percentage points |
United Kingdom | 15% | 16.2 percentage points |
Canada | 15% | 16.2 percentage points |
Australia | 15% | 16.2 percentage points |
Singapore | 15% (10% if interest is paid to a bank) | 16.2 / 21.2 percentage points |
United Arab Emirates | 12.5% | 18.7 percentage points |
Germany | 10% | 21.2 percentage points |
France | 10% | 21.2 percentage points |
Japan | 10% | 21.2 percentage points |
Tax Residency Certificate -- the gateway Without a Tax Residency Certificate from the foreign tax authority, the Indian bank must deduct at the default 31.2% rate. Apply for the Tax Residency Certificate at the start of the tax year -- the United States Internal Revenue Service Form 6166 takes 6 to 8 weeks; the United Kingdom HM Revenue and Customs takes 2 to 3 weeks. Renew annually. |
5. Repatriation -- The Foreign Exchange Management Act Layer
Tax exemption is one half of the picture; the right to send money out of India is the other. The Reserve Bank of India under the Foreign Exchange Management (Deposit) Regulations, 2016 governs repatriation.
Account | Repatriation Limit | Documentation |
|---|---|---|
Non-Resident External | Unlimited -- principal and interest | No specific cap; bank processes through standard Foreign Exchange Management Act forms |
Foreign Currency Non-Resident | Unlimited -- principal and interest | Same |
Non-Resident Ordinary | United States Dollar one million per financial year aggregate from all Non-Resident Ordinary accounts of the same individual | Form A2 plus Form 15CA / 15CB; Tax Deducted at Source must be paid before remittance |
Inheritance / sale of property held for many years | Within the rupees one million per year limit unless special permission obtained from Reserve Bank of India | Possible to apply for higher limit citing genuine hardship |
6. The Form 15CA / 15CB Process for Non-Resident Ordinary Repatriation
- Form 15CB -- Chartered Accountant certificate confirming the nature of the remittance, the income-tax already paid (or exempt), and the rate at which Tax Deducted at Source was deducted (or that no deduction is required).
- Form 15CA -- Self-declaration by the remitter on the income-tax e-filing portal, in one of four parts (Part A, B, C, D) depending on the amount and nature of the remittance.
- Both forms are uploaded to the e-filing portal and a system-generated acknowledgement is shared with the Authorised Dealer bank.
- The bank processes the outward remittance from the Non-Resident Ordinary account against the Form 15CA / 15CB acknowledgement.
- Failure to file Form 15CA / 15CB attracts a penalty of rupees one lakh under section 271-I.
7. Practical Account Strategy for the Non-Resident Indian
- Open a Non-Resident External account for foreign earnings repatriated to India -- interest is tax-free, principal and interest are fully repatriable.
- Open a Non-Resident Ordinary account for Indian-source income (rent, dividend, capital gain, refund) -- interest is taxable, repatriation is capped at United States Dollar one million per year.
- Consider a Foreign Currency Non-Resident deposit if the Non-Resident Indian wants to hold the deposit in foreign currency rather than rupees -- shields against rupee depreciation; interest is tax-free.
- Register a Tax Residency Certificate-based lower deduction certificate with the bank holding the Non-Resident Ordinary account -- avoids the default 31.2% Tax Deducted at Source on interest.
- Track Non-Resident Ordinary repatriation across all banks -- the United States Dollar one million per financial year is an aggregate limit per Permanent Account Number, not per account.
- On returning to India and becoming Resident, convert the Non-Resident External / Non-Resident Ordinary / Foreign Currency Non-Resident account to Resident Foreign Currency or domestic accounts as applicable -- timing matters because tax treatment changes.
BharatTax NRI Compliance Tool Is your Non-Resident status reflected in the income-tax department's Permanent Account Number database, and is your Permanent Account Number-Aadhaar status correctly tagged as exempt? Use the NRI Compliance Tool at itr.bharattax.co to verify, update residential status on the e-filing portal, and pre-validate your Non-Resident External or Non-Resident Ordinary bank account for any refund. |
8. Case Law Reference and Anticipatory Legal Analysis
Case Law Reference: NRE / NRO interest taxation jurisprudence Sub-clause (4) of section 10 of the Income-tax Act, 1961 exempts interest on Non-Resident External (NRE) account deposits and Foreign Currency Non-Resident (FCNR) account deposits from Indian tax for Non-Resident assessees; Non-Resident Ordinary (NRO) account interest is taxable. The Income Tax Appellate Tribunal Mumbai in [VERIFY: confirm Tribunal citation on NRE interest exemption] confirmed the strict-construction principle -- the exemption operates only while the assessee is Non-Resident; on becoming Resident, NRE interest becomes taxable from the day of status change. [VERIFY: cross-check specific Tribunal citations in the BharatTax case-law database.] |
Prospective Interpretation -- The status-change transition mechanic Two unsettled interpretive issues. (i) Treatment of the day of residential-status change -- the day of return triggers the conversion of NRE to Resident Foreign Currency (RFC) account; pre-conversion interest is exempt, post-conversion interest is taxable. (ii) Treatment of NRO interest under section 195 Tax Deducted at Source -- 30% withholding plus surcharge plus cess; the assessee may claim DTAA-based reduction by furnishing Tax Residency Certificate to the bank. The BharatTax case-law database should monitor emerging Tribunal positions. [VERIFY: confirm Tribunal decisions emerging on the post-Finance-Act-2020 framework.] |
9. Key Takeaways
- Non-Resident External and Foreign Currency Non-Resident interest is fully exempt under clause (4)(ii) and sub-clause (iv) of clause (15) of section 10 -- show in Schedule EI.
- Non-Resident Ordinary interest is fully taxable; Tax Deducted at Source under section 195 at 31.2% (default) reducible to 10-15% under the Double Taxation Avoidance Agreement with Tax Residency Certificate plus Form 10F.
- Repatriation -- Non-Resident External / Foreign Currency Non-Resident unlimited; Non-Resident Ordinary capped at United States Dollar one million per financial year per Permanent Account Number.
- Form 15CA / 15CB compliance is mandatory for outward remittance from Non-Resident Ordinary; failure attracts section 271-I penalty of rupees one lakh.
- Foreign Currency Non-Resident accounts shield against rupee depreciation; Non-Resident External does not.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.