Tax on NRO Account Interest: Why the Bank Takes 31.2% and How to Stop Overpaying

You opened an NRO account because you had to. The rent from your flat in Pune, the dividend on the shares you bought before you left, the maturity of a deposit set up in your resident days, all of it has to sit in a Non-Resident Ordinary account once your status changes. Then the first interest credit lands and the bank has quietly taken 31.2% of it. On a Rs 8,00,000 deposit at 7%, that is Rs 17,472 gone from Rs 56,000 of interest, deducted before the money ever touched your account. Most NRIs file this under the cost of doing banking in India. For the large majority, it is nothing of the sort. It is money they are owed back, at a rate they could have cut to 10% or 12.5% in advance with three documents.

The 30-second answer: Interest on an NRO account (savings or deposit) is fully taxable in India as income from other sources, with no exempt threshold. Banks deduct TDS under Section 195 at 30% plus 4% cess, so 31.2%, and higher once surcharge bites. This is the opposite of NRE and FCNR interest, which is tax-free under Section 10(4)(ii) and Section 10(15)(iv)(fa). You can cut the rate to your DTAA treaty rate, 12.5% for UAE residents and 10-15% for the US, UK, Canada, Australia and Singapore, by giving the bank a Tax Residency Certificate, Form 10F and a self-declaration under Section 90. If TDS was over-deducted, file ITR-2 by 15 September 2026 to claim the refund with interest under Section 244A.

This guide assumes you already know the difference between an NRE, NRO and FCNR account and what your residency status means; if not, start with NRE vs NRO vs FCNR accounts and the residency and RNOR guide. For the full return walkthrough, see the hub: ITR filing for NRIs, AY 2026-27. What follows is the part that actually costs money: how the 31.2% is built and when it climbs, why two reliefs every resident takes for granted are denied to you, exactly how much each country's treaty saves, and the two levers (the treaty rate at source and the refund through your return) that bring it back down.

Two reliefs residents get on this same income, and you do not

The reason NRO interest stings is not the headline rate alone. It is that the two cushions a resident sits on are pulled out from under a non-resident on the identical rupee of interest.

Start with the threshold. A resident's fixed deposit attracts no TDS at all until interest crosses Rs 50,000 in a year (raised from Rs 40,000 in Budget 2025, and Rs 1,00,000 for senior citizens). Below that the bank deducts nothing. On an NRO account there is no threshold whatsoever: the deduction starts at the first rupee of interest credited. There is also no Form 15G or 15H escape hatch, because those self-declarations of nil liability are open to residents only. So a resident with Rs 45,000 of FD interest sees zero TDS; an NRI with the same Rs 45,000 loses Rs 14,040 at source.

Then the deductions. Section 80TTA, which exempts up to Rs 10,000 of savings-account interest, is for residents only (Section 80TTB does the same up to Rs 50,000 for resident senior citizens). And the Section 87A rebate, which the 2025 Budget pushed up so that resident income up to Rs 12 lakh under the new regime carries effectively no tax, is restricted to resident individuals. A non-resident gets neither. This is the part that surprises people who have read the headlines about the Rs 12 lakh tax-free limit: that rebate is not yours. Your NRO interest is taxed from the first rupee above your basic exemption, and the basic exemption itself is your only shield.

The single line worth carrying out of this section: the income from other sources head treats your NRO interest exactly like a resident's, but the bank withholds at a non-resident rate and the reliefs that would soften it have all been written to exclude you. The fixes for that are downstream, in the treaty and the return, not in the deduction itself.

How the 31.2% is built, and the new-regime ceiling that replaced 42.74%

The base TDS rate on NRO interest for a non-resident is 30% under Section 195, read with the Finance Act rates for non-residents. On top sits the health and education cess of 4%, charged on the tax and not on the income:

• Base tax: 30%
• Cess: 4% of 30% = 1.2%
• Effective TDS: 31.2%

That is the number for the typical depositor. Surcharge is what lifts it, and it lifts on your total Indian income, not on the interest in isolation. The slabs for FY 2025-26 are 10% above Rs 50 lakh, 15% above Rs 1 crore, 25% above Rs 2 crore, and 37% above Rs 5 crore. Here is the update that most NRO articles still get wrong: the 37% top slab applies only under the old regime. Under the new regime, which is now the default, surcharge is capped at 25% for every income level, including above Rs 5 crore. So the worst-case effective rate on NRO interest is no longer the 42.74% you will see quoted across older blogs. Run the new-regime maths: 30% base, plus 25% surcharge on that 30% (7.5%), plus 4% cess on the 37.5% (1.5%), and you land at roughly 39.94%. Under the old regime, with 37% surcharge, the old 42.74% ceiling still holds.

Almost no NRI hits these tiers on NRO interest alone. The surcharge bites when interest lands in the same year as a property sale or another large India-sourced receipt and the combined total crosses a threshold. For the ordinary reader, hold 31.2% as the number the bank takes, and know that the ceiling, if you ever reach it, is meaningfully lower than the figure the internet keeps repeating.

NRE and FCNR interest is tax-free, and that is the structural fix

This is the most useful single fact in NRI banking, and the reason NRO interest feels punitive by comparison. NRE account interest is exempt under Section 10(4)(ii), and FCNR deposit interest is exempt under Section 10(15)(iv)(fa), for as long as you qualify as a person resident outside India under FEMA. No tax, no TDS, nothing deducted. The same Rs 56,000 of interest that loses Rs 17,472 inside an NRO account loses nothing inside an NRE or FCNR one.

The logic is the source of funds. NRE and FCNR accounts are funded by money earned outside India that the Indian government never had a claim on; NRO accounts hold India-sourced income, which India taxes. You cannot launder your Indian rent through an NRE account, because the rules require India-sourced income to flow through NRO in the first place. But you can ensure your foreign earnings never touch an NRO account: every pound, dollar or dirham of salary you remit home should land in NRE, where its interest is exempt. The slower play, covered below, is to sweep eligible NRO balances across to NRE so that future interest on them stops being taxed at all. For the account-by-account comparison and the currency-risk angle, see NRE vs NRO vs FCNR accounts and NRE vs FCNR for savings.

Your treaty rate, country by country, and the 10% sub-rate most people miss

India has DTAAs with more than 90 countries. A treaty decides which country may tax a given income and caps the rate the source country (India) can charge. For interest, that cap sits well below the 31.2% domestic rate, and Section 90 lets you choose whichever of the Act or the treaty is more beneficial. On NRO interest the treaty wins every time.

The trap in most coverage is treating the treaty rate as a single flat number. For the four main NRI countries plus Singapore and Australia, the interest article actually carries two rates: a lower one, usually 10%, where the interest is paid by or on a loan from a bank carrying on a bona fide banking business, and a general rate, usually 15%, for everything else. NRO fixed deposit interest paid by an Indian bank can fall within the 10% bank-interest limb, and getting your bank to apply 10% rather than the default 15% on a large deposit is worth the conversation. Banks vary in how readily they apply the lower limb, so confirm the exact article and limb your interest falls under before you assume a number.

Country of residence	Treaty interest cap (general)	Bank-interest sub-rate	Net saving vs 31.2% on Rs 1,40,000
UAE	12.5%	12.5%	Rs 26,180
United States	15%	10%	Rs 22,680 to Rs 29,680
United Kingdom	15%	10%	Rs 22,680 to Rs 29,680
Canada	15%	15%	Rs 22,680
Australia	15%	15%	Rs 22,680
Singapore	15%	10%	Rs 22,680 to Rs 29,680

The UAE rate, a flat 12.5% with no surcharge or cess on top, is the standout for the Gulf and matches the favourable treatment UAE residents get elsewhere in the code. For the US and UK, push for the 10% bank-interest limb on FD interest; if the bank insists on 15%, take it and recover the rest in the return. Treaty rates are also exclusive of surcharge and cess, unlike the domestic rate, so the 12.5% or 15% you see is the full deduction, not a base to which 4% cess gets added.

The treaty rate is never automatic. To get it applied at source, the bank needs three things from you, refreshed every financial year:

1. A Tax Residency Certificate (TRC) from your country's tax authority, confirming you are resident there for the year. The US issues this as Form 6166 through the IRS; the UK through HMRC; the UAE through the Federal Tax Authority; Canada through the CRA.
2. Form 10F, filed electronically on the Indian income tax e-filing portal since the 2022-23 mandate. It captures what the TRC may omit: your address, nationality, tax identification number and period of residence. Filing it requires a PAN, which is the chokepoint that traps most people who cannot get the treaty rate.
3. A self-declaration that you are the beneficial owner of the interest and have no permanent establishment in India to which it is attributable.

Hand these to the bank before interest is credited and it deducts at the treaty rate. The detailed mechanics, including how to file Form 10F online, are in DTAA mechanics: TRC and Form 10F; the bank-side process is in reduce NRO TDS using a DTAA; the wider treaty picture is in DTAA relief for NRIs.

Put real numbers on the saving. Priya is a UK tax resident with an NRO fixed deposit of Rs 20,00,000 at 7%, so Rs 1,40,000 of interest for the year, and only small other Indian income. With no documents on file, the bank deducts the domestic 31.2%: Rs 43,680, leaving her Rs 96,320. With her TRC, Form 10F and self-declaration submitted before the credit, the bank applies the India-UK general interest rate of 15%: Rs 21,000, leaving Rs 1,19,000. That is Rs 22,680 she keeps in her account through the year instead of lending it to the tax department interest-free. Had her bank accepted the 10% bank-interest limb, the deduction would have been Rs 14,000, a further Rs 7,000 saved. And here is the part the treaty rate alone does not tell you: because Priya's total Indian income is below the Rs 4 lakh basic exemption, her actual liability is nil, so even the Rs 21,000 is fully refundable when she files. The treaty rate stops the over-deduction at source; the return removes whatever is left.

When the bank already took 31.2%, the return is the only way back

Rohit is a US tax resident who forgot the paperwork, so through FY 2025-26 his bank deducted at 31.2% on his NRO savings and deposit interest. His year:

• NRO interest, gross: Rs 3,00,000
• TDS deducted at 31.2%: Rs 93,600
• Other Indian income: nil

His total Indian income of Rs 3,00,000 sits below the new-regime basic exemption of Rs 4,00,000, so his actual tax liability is nil. Every rupee of the Rs 93,600 is refundable. He files ITR-2 for AY 2026-27 by 15 September 2026 (the NRI deadline was extended from 31 July), reports the Rs 3,00,000 under income from other sources, computes tax at nil after the basic exemption, claims credit for the Rs 93,600 shown in his Form 26AS and Annual Information Statement, and the full Rs 93,600 comes back, plus interest under Section 244A from the start of the assessment year to the date of refund.

Change one input and the lesson sharpens. Suppose Rohit's NRO interest had been Rs 6,00,000. The first Rs 4,00,000 is covered by the exemption; the next Rs 4 lakh slab is taxed at 5%, but only Rs 2,00,000 falls into it, so tax is Rs 10,000 plus 4% cess, about Rs 10,400. Against Rs 1,87,200 deducted at 31.2%, his refund is roughly Rs 1,76,800. Had he filed Form 10F and a TRC in advance and the bank applied the 15% US treaty rate, only Rs 90,000 would have been withheld, and his refund would be Rs 79,600, the same final tax of Rs 10,400 either way. The treaty route does not change the destination; it changes how much of your money the government holds, interest-free, on the way there.

The refund only happens because Rohit filed, his PAN is linked to a pre-validated Indian bank account, and the TDS in his return matched the figures the bank reported in Form 26AS. Miss any of those and the money stays with the government. This is exactly why I tell every NRI with an NRO account to file a return even when the Indian income looks too small to bother with: the refund is almost always larger than the hassle. For the wider mechanics across rent, capital gains and interest, see TDS for NRIs and refunds.

Where the money should actually sit, and the sweep that ends the tax for good

Once the tax is clear, the account choice writes itself, constrained only by the rule that India-sourced income must enter through NRO. Foreign earnings you remit home go into an NRE account every time: interest tax-free, fully repatriable, no surcharge games. India-sourced income (rent, dividends, pension, pre-departure deposit maturities) must sit in an NRO account, taxable, but with the treaty rate applied you keep most of the interest.

The move most NRIs miss is the sweep. If a large NRO balance originally came from your own foreign earnings or from income on which tax has already been paid, you can transfer it from NRO to NRE, up to USD 1 million per financial year, after settling any tax due and completing Form 15CA (your declaration) and Form 15CB (a chartered accountant's certificate). Once the money is in NRE, future interest on it is exempt. So the playbook is three-layered: keep India-sourced flows in NRO; apply the treaty rate to soften the TDS while it sits there; and periodically sweep eligible balances across to NRE so their interest stops being taxed going forward. The mechanics of the cap and the forms are in the NRO repatriation process.

This is also where NRO interest tax and repatriation become the same compliance coin. You can repatriate up to USD 1 million per financial year from NRO, net of tax, and the bank will not release it without Form 15CA and the CA's Form 15CB, on which the CA confirms that tax on the underlying income, the interest included, has been paid or deducted. Sloppy handling of NRO interest does not just cost you a refund; it can stall your repatriation. NRE and FCNR balances, by contrast, repatriate freely with no cap, because the money came from outside India to begin with.

Edge cases worth knowing before you file

The transition year. Residential status is decided year by year under Section 6, with an RNOR (Resident but Not Ordinarily Resident) status in between. In the year you became an NRI, the bank may have deducted at resident rates for part of the year and non-resident rates for the rest. Your final liability is settled in the return on your actual status for the full year. See NRI residency and RNOR rules.

No PAN on file. Without a PAN, Section 206AA can force TDS at the higher of the normal rate or 20%, and, more painfully, you cannot file Form 10F online at all, which means no treaty rate. A PAN is the first thing to fix, before the TRC or anything else.

A Section 197 certificate beats waiting for a refund. If even the treaty rate over-deducts relative to your real liability, apply under Section 197 (Form 13) for a lower or nil deduction certificate directing the bank to withhold less, rather than parking cash with the government for a year. On large interest balances this is worth the effort. The mechanics are in the lower-TDS certificate guide.

Joint NRO accounts. Where an NRO account is held jointly, the tax follows the actual owner of the income. A resident joint holder does not change the non-resident TDS on your share.

A TRC obtained mid-year. If you submit treaty documents partway through the year, the bank applies the treaty rate prospectively, from submission, not retrospectively. The earlier over-deducted months are recovered through your return, not by the bank.

The honest read

NRO interest is one of the few NRI tax problems where the default, doing nothing, is also the most expensive outcome. Leave the account untouched and the bank takes 31.2% from the first rupee, with no threshold and no rebate to cushion it, even though a resident with the same interest might pay nothing. That is not a penalty for getting something wrong; it is simply what happens when you do not act.

So here is the recommendation, and it holds for the overwhelming majority of NRIs reading this. Do three things and treat them as routine, not optional. First, for the year ahead, get a TRC, file Form 10F online (which means sorting your PAN if you have not), and hand both plus a self-declaration to your bank before interest is credited, so the deduction falls to your treaty rate: 12.5% if you are in the UAE, and 15%, or 10% on bank interest if your bank will accept the lower limb, if you are in the US, UK, Canada, Australia or Singapore. Second, for years already gone, file ITR-2 by 15 September 2026 and claim the over-deduction back with interest, especially if your Indian income is below the Rs 4 lakh exemption, in which case the entire deduction is refundable. Third, structurally, stop letting foreign money sit in an NRO account when it belongs in NRE, and sweep eligible balances across so their interest stops being taxed at all.

The exception is the NRI whose Indian income runs into crores in the same year, where surcharge, the new-regime 25% cap, and the repatriation paperwork interact in ways a blog cannot safely generalise. That is the point to put a chartered accountant on it, not to rely on this guide. For everyone else, the 31.2% that felt like an unavoidable cost of banking in India turns into, at most, a low-teens treaty rate, and often into a full refund.

Related guides

• ITR filing for NRIs, AY 2026-27
• NRI residency and RNOR rules
• DTAA relief for NRIs
• DTAA mechanics: TRC and Form 10F
• TDS for NRIs and refunds
• The lower-TDS certificate (Form 13, Section 197)
• Capital gains tax for NRIs on shares and mutual funds
• Tax on Indian rental income for NRIs
• NRE vs NRO vs FCNR accounts
• The NRO repatriation process
• Reduce NRO TDS using a DTAA
• NRE vs FCNR for savings
• Taxation guides
• Banking guides

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This guide is general information, not personal tax or financial advice. Tax rates, surcharge thresholds, exemption limits and treaty provisions change, and your own position depends on your residential status, your country of residence and the specific DTAA in force. Verify current figures against the Income Tax Department and RBI, and consult a qualified chartered accountant or tax adviser before acting on anything here, especially before claiming a treaty rate, filing a return or repatriating funds.