How to Cut the 31.2% TDS Your Bank Deducts on NRO Interest Using DTAA and Section 197

You open your NRO statement, see Rs 4,00,000 of interest credited for the year, and find the bank has quietly taken Rs 1,24,800 of it as tax. That is 31.2% gone before you have lifted a finger. Your cousin in Pune, with an identical fixed deposit, had 10% deducted and could have stopped even that with a single form. You are not being singled out. You are being taxed under the default rule for every non-resident, and almost nobody at the branch will mention that the same law lets you bring that 31.2% down to 12.5% or 15%, or in some cases to nil, if you hand them the right three documents in the right order before the right date.

The 30-second answer: Indian banks deduct TDS on NRO interest at a flat 31.2% (30% under Section 195 plus 4% cess, with surcharge above Rs 50 lakh), because resident reliefs like Form 15G do not apply to non-residents. To get the treaty rate, usually 15% (US, UK, Canada) or 12.5% (UAE), file the bank a Tax Residency Certificate, an e-filed Form 10F acknowledgement (renamed Form 41 for income from 1 April 2026), and a beneficial-ownership declaration invoking Section 90, before its quarterly deduction. The treaty rate is all-in, with no cess on top. For larger balances where your real liability is below the treaty rate, apply for a Section 197 certificate via Form 13 on TRACES. Excess already deducted is reclaimed by filing ITR-2 by 31 July 2026.

The non-obvious thing about this whole exercise is that it is a race against your bank's calendar, not a tax computation. The treaty rate is yours by right, but only on interest credited after your paperwork is on file. Miss the cut-off by a day and you pay 31.2% for the whole quarter and chase the difference for eighteen months. So the order of operations matters more than any single rate. If you also need the wider picture on filing as a non-resident, the companion guide on filing your ITR for AY 2026-27 as an NRI covers which schedules carry this interest and how the refund flows. This piece is the bank-facing half: what to hand the branch, exactly when, what changed on the form this April, and what to do when they have already over-deducted.

The 31.2% is not a mistake, it is the rule when the bank has nothing on file

Interest on an NRO account is fully taxable in India. That part you likely know, and if you want the NRE versus NRO versus FCNR distinction laid out properly, the guide on NRE, NRO, and FCNR accounts does it. The part that costs money is the rate, and the rate is a function of which section the payment falls under.

When a bank pays interest to a resident, it deducts under Section 194A at 10%, and only once the interest crosses Rs 40,000 in the year. That resident can file Form 15G or 15H to declare their income is below the taxable limit and stop the deduction altogether. A payment to a non-resident falls under Section 195 instead, which carries a flat 30% with no threshold, no Form 15G, and no escape hatch. Add the 4% health and education cess and the effective rate is 31.2%. There is no Rs 40,000 cushion; the first rupee of NRO interest is deducted at 31.2%.

It climbs from there. Once your total Indian income crosses Rs 50 lakh, surcharge starts at 10% of the tax; above Rs 1 crore it is 15%, and under the new regime it caps at 25% at the top, so a very large NRO interest book can see an effective rate near 35.88%. The figures most blogs quote, including this one, are the base case before surcharge. If your interest runs into tens of lakhs, the gap between 31.2% and the treaty rate is wider than the headline suggests, which makes the paperwork more valuable, not less.

The bank is not exercising discretion when it deducts 31.2%. It is forbidden from assuming you qualify for a treaty. It deducts the Section 195 rate unless you give it documentary proof that a lower rate applies, and that proof is entirely in your hands. The deeper mechanics of why NRO interest is taxed this way sit in tax on NRO interest; what follows is how to switch the rate off.

The DTAA route: a TRC, an e-filed Form 10F, and a self-declaration, filed before the deduction

India has signed Double Taxation Avoidance Agreements with more than ninety countries, including all four main NRI destinations. Each treaty's "Interest" article caps the rate at which India may tax interest paid to a resident of the other country, and that cap sits well below 31.2%. Section 90 of the Income-tax Act is the lever: where a treaty rate is more beneficial than the Act's rate, you may apply the treaty rate. But Section 90 does not switch itself on. You trigger it by giving the bank three things, together, before it runs the quarter's deduction.

The Tax Residency Certificate (TRC) is the foundation. It is issued by the tax authority of your country of residence and confirms you were a tax resident there for the relevant period. The UAE issues it through the Federal Tax Authority, the UK through HMRC, the US as Form 6166 from the IRS, and Canada through the CRA. The trap is coverage: the TRC must span the Indian financial year, April to March, not your home country's tax year. A US Form 6166 is issued on a calendar-year basis, so a single certificate never cleanly covers an Indian financial year, and you may need two on file to bracket April to March. Interest credited outside the certified window reverts to 31.2%.

Form 10F, filed electronically, supplies what a TRC often omits: your status, nationality, tax identification number, period of residence, and address. Since 1 October 2023, Form 10F must be filed online on the income tax e-filing portal; the old signed-paper version handed across the counter is dead. You log in, file the form, and the portal generates an acknowledgement, and it is that system-generated acknowledgement, not a printout, that the bank files. Here is the change that is live as you read this: from 1 April 2026, under the Income-tax Act 2025 and the new Income-tax Rules 2026, the e-filed Form 10F is renamed Form 41 (Section 159(8) replaces the old Section 90(5); Rule 75 replaces Rule 21AB). Form 10F still governs interest credited up to 31 March 2026; Form 41 governs interest from 1 April 2026, on a separate tab of the same portal. The substance is unchanged, but if your bank's relationship manager insists on "Form 10F" for FY 2026-27 interest, they are a form-number behind, and the portal will route you to Form 41.

The beneficial-ownership self-declaration is the third piece, and it is not a formality. Treaty interest articles grant the lower rate only to the beneficial owner of the interest. The bank will ask you to declare, on its format or a plain letter, that you are the beneficial owner of the NRO interest, that you are a tax resident of the treaty country, and that you have no permanent establishment in India to which the interest is attributable. Most banks fold the written request to apply Section 90 into the same letter.

Hand over all three before the deduction date and the bank reprograms its system to the treaty rate going forward. The step-by-step of TRC and Form 10F, including the registration route for filers without a PAN, is in DTAA mechanics: TRC and Form 10F, and the wider relief picture is in DTAA relief for NRIs.

The treaty rate you can actually get, by country

The cap depends on your country of residence and the specific article. For ordinary NRO deposit interest, these are the working numbers once the paperwork is on file:

Country of residence	Treaty article	NRO interest rate	Default if no paperwork
UAE	Article 11, India-UAE DTAA	12.5%	31.2%
United States	Article 11, India-US DTAA	15%	31.2%
United Kingdom	Article 12, India-UK DTAA	15%	31.2%
Canada	Article 11, India-Canada DTAA	15%	31.2%

A few treaties carve out a lower 10% band for interest paid to a bank on a bona fide loan. That carve-out does not apply to a personal NRO deposit, so ignore any adviser who quotes you 10% on that basis for an individual's account. For a personal NRO holder, 12.5% in the Gulf and 15% in the West are the realistic figures.

Two points that quietly improve the deal. First, the treaty rate is all-in: when you apply it, the 4% cess and any surcharge fall away. So 12.5% means 12.5%, not 12.5% plus cess; 15% means 15%, full stop. Second, Rule 37BC protects you if you somehow lack a PAN. Normally Section 206AA forces TDS at the higher of the normal rate or 20% when no PAN is on file, but Rule 37BC exempts non-residents from that penalty for interest, provided they supply name, address, TIN, and a TRC. (Section 206AB, the higher-rate-for-non-filers provision, was omitted from 1 April 2025, so that worry is gone.) For an NRO holder with ongoing Indian income a PAN is still the cleaner path, since you need it to file ITR-2 and claim any refund anyway.

Put a real number on the saving. Priya is a UAE resident whose NRO fixed deposits credit Rs 6,00,000 of interest in FY 2025-26. With nothing on file, the bank deducts Section 195 at 31.2%, that is Rs 1,87,200, and Rs 4,12,800 reaches her account. With her Federal Tax Authority TRC, an e-filed Form 10F acknowledgement, and a beneficial-ownership letter lodged before each quarterly deduction, the bank applies the India-UAE rate of 12.5%, so Rs 75,000, and Rs 5,25,000 reaches her. The treaty route keeps Rs 1,12,200 in her account this year, at source, with no refund to chase. The cost was a TRC, ten minutes filing the form online, and a one-page letter. Had Priya been a UK resident instead, the rate would be 15%, so Rs 90,000 of TDS, still a Rs 97,200 saving over the default.

Section 197 goes below the treaty rate, but only for the right balance

The DTAA route caps you at the treaty figure, 12.5% or 15%. It cannot go lower, even if your true Indian liability is nil. That is the gap Section 197 fills. Picture a UK retiree whose only Indian income is Rs 3,00,000 of NRO interest. Under the new regime the basic exemption is Rs 4,00,000 for AY 2026-27, so his actual tax is zero, yet the treaty route would still have the bank withhold 15%, Rs 45,000, that he then waits a year to reclaim. The treaty rate is a cap, not a match to his real liability.

The fix is a lower or nil deduction certificate under Section 197, applied for using Form 13 on the TRACES portal. The Assessing Officer issues it to the bank, directing a specific lower rate, or nil, for the financial year. It is the only route that can take NRO TDS below the treaty rate, and the only route to a genuine nil deduction at source.

How it runs in practice. You log in to the TRACES portal (the NRI section is at nriservices.tdscpc.gov.in), select Request for Form 13, and enter your estimated income for the year, your computed liability, the bank's TAN, and supporting detail. You upload documents: at a minimum your returns for the last three years, a projection of the current year, and your treaty papers if you are also relying on a treaty position. The AO reviews and, if satisfied, issues a certificate stating the rate, which you then give the bank. Approval typically takes a few weeks to two months, so this is not a same-quarter fix.

The timing windows catch people out. The Form 13 functionality for a financial year opens ahead of that year, the FY 2026-27 window opened on 10 February 2026, and the certificate is valid only for the year it is issued for, so this is an annual exercise, applied for early. There is no statutory last date to apply, but applying after the year's interest has already been credited and deducted defeats the point; you would be left reclaiming through the return anyway.

The honest framing is narrow on purpose: Form 13 is worth it only when the amount is large and your real liability sits well below the treaty rate, the retiree above, or someone with deductions and losses that wipe out the interest. For a modest balance where 15% roughly matches your slab liability, the DTAA route is faster and you mop up any small excess in the return. Do not apply for Form 13 to save a few thousand rupees; the AO processing and three years of history are not worth it at that size. The broader TDS-and-refund picture is in TDS for NRIs and refunds.

The deduction date is the only date that matters

TDS on NRO interest is deducted when the interest is credited or paid, which for most banks is quarterly, and the rule that decides whether you save tax this year or next is blunt: the rate in force on the deduction date is the rate that applies. If your TRC, Form 10F acknowledgement, and declaration are on the bank's file before it runs that quarter's deduction, you get the treaty rate on that quarter's interest. If they land the next day, you pay 31.2% on the whole quarter and recover the difference through your return, a year and a half later.

Most banks set an internal cut-off two to three weeks before quarter-end to process treaty documents, and a few large private banks route the paperwork through a central NRI cell rather than the branch, which adds days. So do not aim for the last day, and do not assume the branch will chase you. The discipline that works: file your fresh Form 10F (Form 41 from April 2026) online at the start of the financial year, obtain your new TRC as early as your home authority will issue it, and lodge the full bundle with the bank in April, ahead of the first interest credit. Renew before the first deduction of the year, not after the last one. This is the single behaviour that separates NRIs who pay 12.5% from those who pay 31.2% and spend their summer filing for a refund.

Reclaiming what was already over-deducted: file ITR-2

Suppose the first quarter ran at 31.2% before your paperwork was in place, or you never filed treaty documents at all. The bank will not, and legally cannot, reverse a deduction it has already deposited with the government. That money now sits as TDS credit against your PAN, and the only way back is your Indian income tax return.

For a non-resident reporting NRO interest the form is ITR-2. You report the gross NRO interest under income from other sources, apply the rate you are actually liable for (the lower of your treaty rate and your slab liability after the basic exemption), claim the full TDS shown against your PAN in Form 26AS and the Annual Information Statement, and the excess of TDS over your real liability is refunded to your bank account, often with interest under Section 244A. The due date for AY 2026-27 (income earned in FY 2025-26) is 31 July 2026, and a non-resident must file to claim a refund even when total Indian income is below the Rs 4 lakh basic exemption, because the refund is not automatic. No return, no refund.

This is where the cost of missing the bank cut-off becomes concrete. Arvind lives in the UK and forgot his treaty papers before the year began, so his Rs 3,00,000 of NRO interest in FY 2025-26 was deducted at the full 31.2%, that is Rs 93,600, now sitting in his Form 26AS. His only Indian income is that interest. Computed in ITR-2 under the new regime, his Rs 3,00,000 is below the Rs 4,00,000 exemption, so his actual liability is zero, below even the 15% UK treaty cap. He files by 31 July 2026, claims the Rs 93,600, and the whole amount is refunded, typically with some Section 244A interest. The point is not that the return saved him. The point is that he lent the government Rs 93,600 interest-free for up to eighteen months when a TRC, an e-filed Form 10F, and a one-page letter in April, or a Section 197 nil certificate, would have meant the bank withheld nothing of consequence in the first place. The return is the safety net. The paperwork at source is the plan.

Edge cases that change the answer

Joint NRO accounts. Where the account is held jointly, the treaty position and the TRC belong to the first holder whose income it is. A resident joint holder does not let you escape the non-resident rate on a non-resident's income; match the documents to whoever actually owns the interest.

A TRC that does not span the Indian year. The treaty rate is safe only for the months the TRC covers. This bites US residents hardest, since Form 6166 is calendar-year and the Indian year runs April to March, so a single certificate leaves a gap at one end. Get a TRC spanning the Indian financial year wherever your authority allows, or hold two overlapping certificates and be ready to true up the boundary months in your return.

Surcharge on a large interest book. The 31.2% is the base case. Cross Rs 50 lakh of total Indian income and surcharge lifts the effective default rate toward 35.88%, which makes the treaty route or a Section 197 certificate more valuable at high balances, not less. The treaty rate, being all-in, sheds the surcharge entirely.

The form is mid-transition right now. Across FY 2026-27 you will likely file both: Form 10F logic for any FY 2025-26 interest still being trued up, and Form 41 for interest credited from 1 April 2026. If a bank portal or RM rejects "Form 41" as unknown, escalate, because the Income-tax Rules 2026 made it the operative form from April. The acknowledgement number is what the bank stores either way.

Becoming resident again (RNOR). If you return to India your residential status changes and so does the rate logic; the Section 195 and treaty machinery here applies while you are a non-resident, not after. The interplay is in NRI residency and RNOR rules.

The honest read

For most NRO account holders, the DTAA route is the right default, and the recommendation is to treat it as an April ritual: a TRC covering the Indian financial year, an e-filed Form 10F (Form 41 from this April), and a one-page beneficial-ownership declaration, lodged with the bank before the first quarter's deduction. That takes your TDS from 31.2% to 12.5% if you are in the Gulf or 15% in the US, UK or Canada, all-in with no cess, and you keep the difference in your account instead of chasing it. Done once a year, before the first interest credit, it is the highest-return paperwork an NRI does on the banking side.

Reach for Section 197 and Form 13 only when the amount is large and your real liability sits well below the treaty rate, the retiree whose interest falls under the Rs 4 lakh exemption, or anyone whose deductions or losses swallow the interest. It can reach a genuine nil rate, but it costs weeks of AO processing and three years of return history, and for a modest balance it is overkill that you will regret applying for.

And whatever you manage at the branch, file ITR-2 by 31 July 2026 if anything was over-deducted at all. The bank cannot return what it has already paid the government; only your return can. The clean outcome is the dull one: documents in early, treaty rate at source, and a return that merely confirms small numbers rather than rescuing large ones. Money kept at source is always worth more than money refunded eighteen months later, and on a five or six-figure interest book that difference alone pays for a good cross-border CA several times over.

Related guides

• NRE, NRO, and FCNR accounts compared
• The NRO repatriation process
• Tax on NRO interest
• DTAA relief for NRIs
• DTAA mechanics: TRC and Form 10F
• TDS for NRIs and refunds
• Filing your ITR for AY 2026-27 as an NRI
• NRI residency and RNOR rules
• NRE versus FCNR for savings
• Repatriating investment proceeds
• All taxation guides
• All banking guides
• All investment guides

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This guide is general information for Indian expats, not personal tax advice. Treaty rates, TDS rules, Section 197 procedures, form numbers (Form 10F transitioning to Form 41 from 1 April 2026) and filing deadlines change, and your own position depends on your country of residence, your residential status, and the specific terms of the applicable DTAA. Verify the current rules on the income tax e-filing portal and the TRACES portal, and consult a qualified chartered accountant or cross-border tax adviser before acting on a treaty position or applying for a lower-deduction certificate.