Under the Income Tax Act, 2025 | Effective 1 April 2026
“I earn interest on my NRE and NRO accounts do I owe tax on it?” One of the most common questions from NRIs. Let’s cut through the complexity.”
The Income Tax Act, 2025 — India’s biggest tax overhaul in 60+ years — came into force on 1 April 2026. It slashed sections from 819 to 536, consolidated all TDS rules under one section, and replaced “Assessment Year” with a simpler “Tax Year” concept. While the structure changed dramatically, the core tax treatment of NRE/NRO interest remains the same but compliance is now stricter and clearer.
Advantages and Disadvantages of Each Account
| Feature | NRE Account (External) | NRO Account (Ordinary) |
| Tax on Interest | Zero. No tax in India. | Taxable. Default TDS is 30% (+ Cess). |
| Repatriation | Unrestricted. Move principal and interest abroad freely. | Restricted. Repatriation limited to USD 1 Million per year. |
| Source of Funds | Only foreign earnings. | Both Indian (Rent, Dividends) and foreign earnings. |
| Joint Holding | Only with another NRI. | Can be held with a resident Indian relative. |
NRE Account: Tax-Free, But Not Reporting-Free
Interest on your NRE (Non-Resident External) account is exempt from Indian income tax a benefit retained under the Income Tax Act, 2025 (previously Section 10(4)(ii) of the 1961 Act).
New Disclosure Rule: Even though NRE interest is tax-free, you must report it in ITR if it exceeds ₹50,000. Skipping this can trigger notices, even when no tax is owed.
Remember: Never deposit Indian-sourced income (rent etc) into your NRE account — this violates FEMA regulations.
NRO Account: Taxable But DTAA Can Help
Interest on your NRO (Non-Resident Ordinary) account is fully taxable in India since the income arises in India. Banks automatically deduct TDS at 30% + 4% Health & Education Cess = ~31.2% (higher surcharge applies for income above ₹50 lakh)
Reduce Your Tax Burden via DTAA
India has DTAAs with 90+ countries. If you reside in a DTAA country, you may qualify for a lower tax rate on NRO interest.
To claim DTAA benefits, submit to your bank:
- Tax Residency Certificate (TRC) – from your country of residence
- Form 10F – self-declaration form
Submit before TDS is deducted. If already deducted at 30%, claim your refund via ITR filing.
Moving Money: NRO → NRE Transfer
Want to move taxed NRO funds to your repatriable NRE account? It’s allowed — with paperwork:
- Pay all applicable taxes on NRO income
- File Form 145 online (Income Tax portal)
- Obtain Form 146 – Certificate from a Chartered Accountant
- Submit to your bank for the transfer
Principal repatriation from NRO is generally capped at USD 1 million per financial year.
Frequently Asked Questions (FAQs)
Q1: Is NRE FD interest taxable in India under the new Income Tax Act?
A: No. NRE Fixed Deposit interest remains fully exempt from Indian income tax under the Income Tax Act, 2025 just like before. However, you must report it in your ITR if it exceeds ₹50,000.
Q2: What TDS rate applies to NRO account interest?
A: Banks deduct TDS at 30% + 4% cess (≈ 31.2%) on NRO interest. If your income exceeds ₹50 lakh, a surcharge applies, pushing the effective rate higher. You can reduce this by claiming DTAA benefits.
Q3: I live in the USA. Can I claim DTAA benefits on my NRO interest?
A: Yes. Under the India-USA DTAA, NRO interest may be taxed at a reduced rate. Submit your Tax Residency Certificate (TRC) and Form 10F to your bank. If TDS was already deducted at 30%, file an ITR to claim the refund.
Q4: Do I need to file an ITR in India if my only income is NRE interest?
A: Not mandatorily since NRE interest is exempt. But if the interest exceeds ₹50,000, you must disclose it in ITR. Also file if TDS was wrongly deducted or you want to carry forward losses.
Q5: What happens if I deposit rental income into my NRE account?
A: This is a serious violation of FEMA regulations. NRE accounts must only receive foreign income. Depositing India-sourced income like rent or dividends into an NRE account can attract regulatory action. Always credit Indian income to your NRO account.
Q6: Can I transfer money from NRO to NRE account?
A: Yes, after paying taxes. You’ll need Form 145 (online submission) and Form 146 (CA certificate). The principal repatriation limit is generally USD 1 million per financial year.
Conclusion
In 2026, the NRE account remains the “Gold Standard” for NRI savings due to its dual benefit of tax exemption and easy repatriation. However, for managing Indian earnings, the NRO account is a necessity. The trick is to not let the 31.2% TDS be your final tax by using Form 128 or the DTAA provisions, you can significantly protect your Indian interest income.
[Contact our NRI Desk for an NRO Tax Refund Assessment]
About the Author
cajatinsethi
Professional Chartered Accountant with expertise in taxation, financial planning, and business advisory services. Committed to helping businesses and individuals achieve their financial goals through personalized solutions and expert guidance.
