Bank Cut 31.2% TDS on Your NRO FD Interest? You May Owe Far Less
You park ₹20 lakh in an NRO fixed deposit, the bank credits ₹1.4 lakh of interest, and ₹43,680 never reaches you. A resident cousin with the same deposit lost far less, and may have lost nothing at all.
That gap is not a penalty. It is TDS at 31.2%, and for many NRIs it is far more than the tax they actually owe in India. The question is which of three routes gets the money back to you, and how early.
Quick answer: Banks deduct 30% plus 4% cess on NRO interest under section 393(2) of the Income-tax Act, 2025 (old section 195). You can cut that at source with a treaty rate (TRC + Form 41) or a lower or nil TDS certificate in Form 128 (old Form 13), or claim the excess back by filing your return. Form 15G/15H does not work for NRIs.
Contents
Why does the bank deduct 31.2% on NRO interest?
From 1 April 2026, payments to non-residents are covered by section 393(2) of the Income-tax Act, 2025. Interest that is not specifically listed elsewhere falls in Table Sl. No. 17, the successor to old section 195.
Sl. No. 17 says tax is deducted at the "rates in force". For NRO interest, that rate comes from Part II of the First Schedule to the Finance Act, 2026: 30% on the "whole of the other income" of a non-resident individual.
Base rate: 30% (NRO savings and fixed deposit interest).
Health and education cess: 4% of the tax, so the effective rate is 31.2%. The cess exemption on TDS is only for payments to residents.
Surcharge: 10% of the tax if the amounts paid are over ₹50 lakh (up to ₹1 crore), and higher slabs beyond that.
Timing: TDS is deducted when the interest is credited or paid, whichever is earlier. If the payer is a public sector bank, it is deducted only when the interest is actually paid (Note 3 to the table).
NRE interest is different. It is exempt for an individual who is a person resident outside India under FEMA (Schedule IV, Sl. No. 1; old section 10(4)(ii)), so banks do not deduct TDS on it. For the account rules, see NRE vs NRO vs FCNR(B) accounts.
Is NRO interest actually taxed at 30%?
Usually not. TDS is a payment on account. Your actual tax is worked out on your total Indian income at slab rates, and the TDS is then set off against it.
Under the default regime in section 202 of the 2025 Act (old section 115BAC), tax year 2026-27 slabs are:
Nil up to ₹4 lakh.
5% from ₹4 lakh to ₹8 lakh.
10% from ₹8 lakh to ₹12 lakh, then 15%, 20%, 25% and 30% above ₹24 lakh.
Two points catch NRIs. First, the basic exemption does apply to them, so an NRI whose only Indian income is ₹1.4 lakh of interest owes nil tax. Second, the rebate under section 156 (old section 87A) is only for resident individuals, so the ₹12 lakh "zero tax" figure that residents quote does not apply to an NRI.
Route A: getting the DTAA rate at the bank
The definition of "rates in force" in section 2(90)(c) of the 2025 Act (old section 2(37A)(iii)) lets the payer deduct at the rate in a tax treaty under section 159 (old section 90) instead, where that is lower. Most of India's treaties cap tax on interest at 10% to 15%.
India–UAE, Article 11: 12.5% of gross interest (5% applies only to loans granted by banks).
India–USA, Article 11: 15% of gross interest for an individual depositor (10% is for banks and similar lenders).
Other treaties: check Article 11 of the specific treaty on incometaxindia.gov.in. The rate depends on who beneficially owns the interest.
Banks generally ask for four things before the interest is credited:
Tax residency certificate (TRC) from your country of residence covering the period, as required by section 159(8)(a) (old section 90(4)).
Form 41 (earlier Form 10F) under Rule 75 of the Income-tax Rules, 2026, filed on the e-filing portal. See Form 41 for DTAA benefits.
PAN, or at least the details prescribed for non-residents without PAN.
A self-declaration that you are the beneficial owner of the interest and do not have a permanent establishment in India.
Treaty residence is a factual test. If you could be resident in both countries, the tie-breaker decides which treaty position you can take; see how the DTAA tie-breaker works.
Route B: lower or nil TDS certificate
The treaty rate still leaves tax withheld even when you owe nothing. If your Indian income is low, the cleaner route is a certificate under section 395(1) of the 2025 Act (old section 197), applied for in Form 128 (old Form 13) under Rule 213.
The Assessing Officer issues a certificate for a lower or nil rate, based on your estimated total income and tax for the year.
It is addressed to the named deductor (your bank) for the stated amount and period. Give a copy to the bank before the interest is credited.
A valid PAN is mandatory: section 397(2)(f) of the 2025 Act says no certificate is granted on an application without PAN.
Apply early in the tax year. Interest credited before the certificate arrives is taxed at the normal rate.
Worked example: ₹20 lakh NRO FD, NRI in Dubai
Priya lives in Dubai and qualifies as a non-resident for tax year 2026-27. She has a ₹20 lakh NRO fixed deposit at 7%. Illustrative figures:
Scenario | TDS deducted | Actual India tax | Cash locked up |
|---|---|---|---|
No documents given | ₹43,680 (31.2% of ₹1,40,000) | Nil (income below ₹4 lakh) | ₹43,680 |
TRC + Form 41 (treaty 12.5%) | ₹17,500 | Nil | ₹17,500 |
Nil TDS certificate (Form 128) | ₹0 | Nil | ₹0 |
Now add ₹9 lakh of annual rent from her Mumbai flat, on which the tenant deducts 31.2% (₹2,80,800). After the 30% standard deduction her rent income is ₹6.3 lakh, so total Indian income is ₹7.7 lakh.
Tax at slab rates: 5% of ₹3.7 lakh = ₹18,500; with 4% cess, ₹19,240.
Total TDS: ₹2,80,800 (rent) + ₹43,680 (interest) = ₹3,24,480.
Refund due: ₹3,05,240, which she can recover only after filing her return.
Here the treaty rate on interest barely matters. A lower deduction certificate covering both the tenant and the bank is what stops ₹3 lakh being locked up for a year. Rent TDS rules are covered in TDS on rent paid to an NRI.
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Route C: claiming the excess back in your return
If TDS has already been deducted, the only way back is the return. The bank cannot refund TDS it has deposited.
Check Form 26AS (Form 168 under the new rules) and the AIS to confirm the bank reported the TDS against your PAN.
File the return for the tax year by the due date: 31 July 2027 for tax year 2026-27 for most NRIs (section 263 of the 2025 Act; old section 139(1)).
Claim treaty relief in the return where it helps, with your TRC and Form 41 on record.
Report your residential status correctly. A wrong status can change your tax and trigger a notice.
For which return form to use and what to disclose, see NRI return filing for AY 2026-27.
Decision checklist: which route fits you?
Is the deposit NRO, not NRE? NRE interest is exempt, so there is nothing to recover.
What is your estimated total Indian income for the year, including rent, gains and interest?
Is your estimated slab tax below the treaty rate on interest? If yes, prefer a nil or lower certificate (Route B).
Is your slab tax close to or above the treaty rate? Give the bank your TRC and Form 41 (Route A).
Do you hold a valid PAN? Without it, Route B is closed and refunds are impractical.
Will a large deposit mature or credit interest early in the year? Apply before that date.
Do you claim foreign tax credit abroad? Check how much Indian tax your country will actually credit.
Common mistakes that cost NRIs money
Submitting Form 15G or 15H. These forms (now Form 121) are for residents. Banks will reject them, or accept them wrongly and then face a demand.
Sending the TRC after the interest is credited. Treaty relief at source applies to future credits only. Earlier excess TDS has to be recovered through the return.
Assuming a zero-tax position because residents pay nothing up to ₹12 lakh. The section 156 rebate is not available to NRIs.
Keeping an NRE account after returning to India. The exemption depends on FEMA status. Once you become a person resident in India, interest is taxable and the account should be redesignated.
Ignoring the PAN status. Without a valid PAN, section 397(2) (old section 206AA) can push TDS to the higher rate unless the details prescribed for non-residents in Rule 217 (old Rule 37BC) are given.
Not filing a return because "TDS is final". For most NRIs with excess TDS, filing is the only way to get the money back.
Practitioner insights
Treaty rates cap the total Indian tax, and the prevailing view is that a 12.5% treaty rate is not increased by cess. Some banks still add it. Check the TDS certificate and claim any difference in the return.
For US residents, Indian tax above the treaty rate is generally not creditable in the US. TDS at 31.2% therefore costs real money until the refund comes in.
When an NRI has rent, interest and a property sale in the same year, one certificate application covering all deductors usually gives better results than piecemeal treaty claims.
Keep the TRC, Form 41 acknowledgement and the bank's TDS certificate together each year. Refund processing and later queries usually turn on these three documents.
Summary table: old and new references
Item | Income-tax Act, 1961 | Income-tax Act, 2025 (from 1 April 2026) |
|---|---|---|
TDS on payments to non-residents | Section 195 | Section 393(2), Table Sl. No. 17 |
Treaty rate as "rate in force" | Section 2(37A)(iii) | Section 2(90)(c) |
Treaty relief / TRC | Section 90, 90(4) | Section 159, 159(8)(a) |
Treaty particulars form | Form 10F, Rule 21AB | Form 41, Rule 75 |
Lower / nil TDS certificate | Section 197, Form 13 | Section 395(1), Form 128 |
No-TDS declaration (residents only) | Section 197A, Form 15G/15H | Section 393(6), Form 121 |
Higher TDS without PAN | Section 206AA, Rule 37BC | Section 397(2), Rule 217 |
NRE interest exemption | Section 10(4)(ii) | Schedule IV, Sl. No. 1 (s.11) |
Rebate for residents | Section 87A | Section 156 |
Return due date | Section 139(1) | Section 263 |
Tax credit statement | Form 26AS | Form 168 |
Frequently asked questions
What is the TDS rate on NRO FD interest for NRIs in 2026-27?
30% plus 4% health and education cess, which is 31.2%, under section 393(2) Table Sl. No. 17 of the Income-tax Act, 2025 (old section 195) read with the Finance Act, 2026. Surcharge is added if the interest paid is over ₹50 lakh. A lower treaty rate can apply if you give the bank a TRC and Form 41.
Can an NRI submit Form 15G or 15H to stop TDS on NRO interest?
No. Form 15G and 15H (now Form 121 under section 393(6)) cover TDS on payments to residents under section 393(1). Interest to a non-resident falls under section 393(2), so a declaration does not stop it. The NRI route to nil or lower TDS is a certificate under section 395(1) (old section 197).
Is interest on an NRE account taxable in India?
Interest on an NRE account is exempt for an individual who is a person resident outside India under FEMA, or who is permitted by RBI to maintain the account (Schedule IV, Sl. No. 1 of the 2025 Act; old section 10(4)(ii)). The exemption follows FEMA status, so it stops once you return to India for good and the account should be redesignated.
Which documents does a bank need to apply the DTAA rate on NRO interest?
Usually a tax residency certificate from your country of residence for the relevant period, Form 41 (earlier Form 10F) filed on the income-tax portal, your PAN, and a declaration that you are the beneficial owner and have no permanent establishment in India. Submit them before the interest is credited; banks do not reverse TDS already deposited.
How do I get back excess TDS deducted on NRO interest?
File your Indian income-tax return for the tax year by the due date (31 July for most NRIs, under section 263 of the 2025 Act; old section 139(1)). The TDS appears in Form 26AS (now Form 168) and the AIS. If your tax on total Indian income is lower than the TDS, the difference is refunded, generally with interest.
Do NRIs get the section 87A rebate or basic exemption?
NRIs get the basic exemption under the slab rates (nil up to ₹4 lakh under the default regime in section 202 for tax year 2026-27). The rebate under section 156 (old section 87A) is only for resident individuals, so an NRI with ₹6 lakh of Indian income still pays some tax.
Can I claim credit abroad for the TDS deducted in India?
Usually yes, for the Indian tax that the treaty allows India to charge, under the foreign tax credit rules of your country of residence. Tax deducted above the treaty rate is generally treated as recoverable from India, not creditable abroad, so it is better to get the treaty rate or claim the refund in India. A country with no income tax, such as the UAE, gives no credit at all.
Related reading
Sources
Income-tax Act, 2025 (text on incometaxindia.gov.in): sections 2(90), 11 and Schedule IV, 156, 159, 202, 263, 393(2) Table Sl. No. 17 and Note 3, 393(6), 395(1), 397(2). Income-tax Act, 1961: sections 2(37A), 10(4)(ii), 87A, 90, 139(1), 195, 197, 197A, 206AA. Income Tax Department correspondence table for TDS sections, rules and forms (1961 to 2025). Income-tax Rules, 2026: Rules 75, 213 and 217; Forms 41, 121, 128 and 168. Finance Act, 2026, First Schedule Part II. India–UAE DTAA Article 11 and India–USA DTAA Article 11 (incometaxindia.gov.in). Figures are illustrative, use default-regime slab rates for tax year 2026-27 and ignore surcharge. Educational content only, reflecting the law as of 8 November 2026.
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