NRIs Interest Income Taxability in India

Under Indian tax law, an NRI is taxed only on income that is earned or received in India. So, interest income from Indian sources is taxable in India, unless specifically exempt.

The taxability of interest income for Non-Resident Indians depends on the type of account where the interest is earned. NRIs earning interest income from India must understand which income is taxable and which is exempt from taxation.

Types of Interest Income for NRI

EXEMPT INTEREST INCOME

1. Interest on NRE Account:

   Interest earned on credit balances in NRE accounts is completely tax-free under Section 10(4)(ii) of the Income Tax Act. NRE accounts are freely repatriable (both principal and interest can be transferred outside India).

• NRE = Non-Resident External account
• Includes NRE Savings and NRE Fixed Deposits
• Taxability: Fully exempt
• TDS: No TDS (since income is exempt)

2. Interest on FCNR (Foreign Currency Non-Resident) Account :
   

   Interest earned on FCNR accounts is also entirely tax-exempt and freely repatriable under Section 10(15)(iv)(fa).

• FCNR = Foreign Currency Non-Resident Deposit
• Deposits held in foreign currency with Indian banks
• Taxability: Fully exempt
• TDS: No TDS

3. Tax-Free Bonds (Notified PSU Bonds, Old NRI Bonds):

     COMPLETELY EXEMPT under Section 10(15)(iv)(h) and Section 10(15)(iid)

• These are the ONLY government bonds with complete interest exemption for NRIs
• Must meet specific notified criteria

TAXABLE INTEREST INCOME

1. Interest on NRO Account:

   Interest earned on NRO accounts is fully taxable in Indiaunder the Income Tax Act, 1961. NRO accounts are used to manage income earned in India from sources such as rent, dividends, or interest from Indian investments.

• NRO = Non-Resident Ordinary Account
• Used for income earned in India (rent, pension, dividends, etc.)
• Taxability: Fully taxable at slab rates
• TDS: 30% + cess (31.2%)

2. Interest on NRO Fixed Deposit :

   Interest from bank fixed deposits held in regular accounts (not NRE or FCNR) is taxable for NRIs.

• Taxability: Fully taxable at slab rates
• TDS: 30% + cess (31.2%)

3. Post Office Fixed Deposits:

   While Post Office schemes are available to residents, NRIs are not allowed to make new investments in Post Office Fixed Deposits. However, if an NRI invested before becoming non-resident, the interest remains taxable.

• Taxability: Fully taxable at slab rates
• TDS: 30% + cess (31.2%)

4. Regular Government Securities & Bonds (G-Secs, T-Bills, SDLs):

FULLY TAXABLE at applicable income slab rates (approximately 30% for NRIs)

• No TDS is deducted on interest, BUT you must report and pay tax
• Only specifically notified PSU tax-free bonds are exempt
• Regular government securities are NOT tax-free despite common misconceptions

5. Foreign Currency Bonds:

SPECIAL RATES under Section 115A(1)(a) – either 5% or 20% (much lower than 30%). Significantly more favorable for NRIs with        foreign currency investments.

Here’s a comprehensive table summarizing the Taxability of Interest Income for NRIs under Indian tax law:

 Interest Income Taxability for NRIs