NRI Fixed Deposit TDS Section 195: Why It Is 30% Plus Cess Even on NRO Deposits

Resident depositors in India see bank deposit interest taxed at slab rates with TDS triggered only beyond Rs 40,000 (Rs 50,000 for senior citizens) under Section 194A of the Income Tax Act 1961. Non-resident Indians (NRIs) face a different regime altogether. Every rupee of interest paid into a Non-Resident Ordinary (NRO) fixed deposit is withheld at 30% plus a 4% Health and Education Cess (an effective 31.2%) from the very first rupee, with no Rs 40,000 threshold and no eligibility for the Section 87A rebate that residents enjoy. The statutory authority lies in Section 195 of the Income Tax Act 1961, supplemented by Section 206AA when a valid Permanent Account Number is missing, and the rate climbs higher once income crosses surcharge slabs.

This article walks through why the 31.2% headline rate exists, when treaty relief can reduce it to 12.5% (UAE) or 15% (USA, UK, Singapore, Canada), how the corresponding NRE fixed deposit escapes Indian tax under Section 10(4)(ii), and what paperwork an NRI must file to claim refund or treaty benefits. Every figure cited reflects the law as it stands for Financial Year 2025-26 (Assessment Year 2026-27).

FEMA / DTAA Position

The Foreign Exchange Management Act 1999 (FEMA), administered by the Reserve Bank of India, governs which deposit accounts an NRI may operate. Under the Foreign Exchange Management (Deposit) Regulations 2016 (Notification No. 5(R)/2016-RB), an NRI defined in Regulation 2(vi) may hold three deposit categories: NRE (Non-Resident External), NRO (Non-Resident Ordinary), and FCNR(B) (Foreign Currency Non-Resident Bank). Each carries a distinct income-tax footprint that flows from the source-of-funds rule rather than from residential status alone. Section 6 of FEMA permits inward remittance under the Liberalised Remittance Scheme up to USD 250,000 per Financial Year for residents; for NRIs, the deposit and repatriation framework is governed by the RBI Master Direction on Deposits and Accounts (No. 14/2015-16, last updated 9 January 2024).

India maintains comprehensive DTAAs with over 90 countries. For interest income, the relevant article is typically Article 11 of the OECD-style treaty, which permits source-state taxation but caps it at a treaty rate. The rates below cover the five jurisdictions that house the bulk of Indian NRO depositors:

These treaty rates override the 31.2% domestic rate only if the NRI furnishes a valid Tax Residency Certificate (TRC) issued by the foreign tax authority and files Form 10F electronically on the Income Tax e-filing portal, as mandated by CBDT Notification No. 03/2022 dated 16 July 2022 and clarified by Notification No. 03/2025 dated 19 February 2025. Without these, Section 90(4) of the Income Tax Act 1961 denies treaty benefits and the bank withholds at the full 31.2%.

Tax Treatment in India

The charging mechanism for NRO fixed deposit interest sits at the intersection of two provisions. Section 5(2) brings within the Indian tax net all income that accrues, arises, or is received in India irrespective of residential status. Section 195(1) requires any person paying a sum to a non-resident which is chargeable under the Act to deduct tax at source at the rates in force.

The 'rates in force' for interest paid to a non-resident individual under Section 195 are prescribed by Part II of the First Schedule to the Finance Act 2025. The base rate is 30%, plus the 4% Health and Education Cess levied by Section 2(11) of the Finance Act 2025, producing an effective deduction of 31.2% on interest below Rs 50 lakh. Surcharge applies once aggregate income crosses Rs 50 lakh, with the new tax regime now capping surcharge at 25% (down from the earlier 37%) under the proviso to Section 2(3)(c) of the Finance Act 2023, retained in subsequent Finance Acts.

A further trap awaits NRIs without a Permanent Account Number. Section 206AA, inserted by Finance (No. 2) Act 2009 and effective from 1 April 2010, requires the higher of (i) the rate prescribed in the Act, (ii) the rate in force, or (iii) 20%. Rule 37BC of the Income Tax Rules 1962, inserted by CBDT Notification No. 53/2016 dated 24 June 2016, exempts non-residents from Section 206AA for interest, royalty, fees for technical services, and transfer of capital assets if they furnish name, email, contact number, address, TRC, and Tax Identification Number. Without Rule 37BC compliance, treaty benefits are blocked and the 30% (plus cess) rate prevails.

NRE and FCNR(B) interest sit at the opposite end of the spectrum. Section 10(4)(ii) exempts interest credited to an NRE account 'maintained in accordance with FEMA 1999, and the rules made thereunder', subject to the depositor being a person resident outside India under Section 2(w) of FEMA. Section 10(15)(iv)(fa) similarly exempts interest on FCNR(B) deposits. The bank applies no TDS at all on these accounts. The asymmetry is deliberate: NRE and FCNR(B) deposits represent inward remittance of foreign currency, which India seeks to encourage; NRO deposits typically warehouse Indian-source income (rent, dividends, pension, sale proceeds) on which the resident-equivalent tax must still be collected.

For depositors whose total Indian income falls below the Rs 12 lakh new-regime rebate threshold under Section 87A as amended by the Finance (No. 2) Act 2024 (rebate of up to Rs 60,000 for FY 2025-26), the 31.2% TDS will exceed the actual liability. Recovery requires filing an Income Tax Return in Form ITR-2 by 31 July 2026 to reclaim the excess. The Section 87A rebate is not available against NRO interest taxed at the special 30% rate under Section 195; it applies only to income chargeable at slab rates.

Tax Treatment Abroad

Once TDS has been suffered in India, the NRI's home country typically taxes the same interest as worldwide income. Relief flows through the credit method (Article 25 in most India treaties).

For a US-resident NRI, IRC Section 901 grants a Foreign Tax Credit against US federal income tax for the Indian TDS paid, capped at the US tax otherwise payable on that interest under Section 904. The taxpayer files Form 1116 with Form 1040. Because the DTAA Article 11 rate for India-US is 15%, the IRS permits credit only up to 15% even if the bank actually withheld 31.2% — the excess 16.2% must be reclaimed from India by filing the Indian return.

A UK-resident NRI relies on Section 18 of the Taxation (International and Other Provisions) Act 2010 (TIOPA) for unilateral credit, supplemented by the India-UK DTAA dated 26 October 1993 which caps the source rate at 15%. HMRC accepts an Indian Form 16A as evidence of withholding, but again only the 15% treaty rate is creditable.

The UAE position is unique because the UAE levies no personal income tax under Federal Decree-Law No. 47 of 2022 on Corporation Tax (Article 11(6) excludes wages, savings interest, and personal investment income). A UAE-resident NRI thus pays nothing locally on the Indian interest and the 12.5% Indian DTAA rate is the final cost. Securing the 12.5% rate demands a TRC issued by the UAE Federal Tax Authority, which requires UAE physical presence of at least 183 days, an Emirates ID, and proof of an active UAE establishment.

A Singapore-resident NRI receives credit under Section 50 of the Singapore Income Tax Act 1947 for Indian TDS up to the 15% treaty rate. Singapore does not tax foreign-source income remitted by individuals, so the 15% DTAA rate becomes the absolute cost. The 2017 Protocol to the India-Singapore DTAA imposes a Limitation of Benefits clause requiring substantial economic presence, which can disqualify shell-company structures. A Canada-resident NRI claims credit under Section 126 of the Canadian Income Tax Act, again capped at the 15% treaty rate.

Repatriation Mechanics

Moving the post-tax NRO interest abroad requires navigating both FEMA and the Income Tax Act. Under the RBI Master Direction on Deposits and Accounts (No. 14/2015-16), an NRI may repatriate up to USD 1 million per financial year (April-March) from an NRO account, inclusive of capital and current income, provided the funds represent legitimate Indian-source income on which applicable taxes have been paid.

The documentary trail is fixed by RBI A.P. (DIR Series) Circular No. 56 dated 26 November 2002 and subsequent updates: a Form A2 application with Form 15CA filed online on the Income Tax portal certifying that taxes have been paid, plus Form 15CB issued by a Chartered Accountant if the remittance exceeds Rs 5 lakh in a financial year and is taxable. CBDT Rule 37BB (substituted by Notification No. 93/2015 dated 16 December 2015) governs the operational detail.

FCNR(B) and NRE balances do not consume the USD 1 million ceiling — both are freely repatriable under the FEMA Deposit Regulations.

For those weighing whether to keep maturing FD proceeds in NRO or convert to NRE, transfer is permitted only up to the USD 1 million ceiling and only after Form 15CA / 15CB compliance certifying that taxes are settled. The conversion is treated as a repatriation for ceiling purposes. Use the NRI Tax Calculator to compute the residual after Indian withholding and the Repatriation Calculator to model the USD 1 million cap utilisation across multiple income streams. The Rental Income Tax Calculator can quantify the rental component of total Indian income, useful when planning to keep aggregate income below the Rs 50 lakh surcharge threshold.

For those new to the NRO-versus-NRE choice, the previously published comparison NRO vs NRE Account: Tax Treatment, Repatriation, Joint-Holding Rules Compared lays out the structural differences, while Repatriation USD 1 Million Per Year Rule: RBI Master Direction Walkthrough for NRO Account Holders covers the Form 15CA / 15CB workflow in operational detail.

Section 195(2) permits a Lower Deduction Certificate under Section 197 if the actual liability is materially below 31.2%; the application uses Form 13 on the TRACES portal and is valid for the financial year.

FAQ

Why is TDS on NRO FD 30% when residents pay only 10%?

Residents are covered by Section 194A which deducts 10% only above Rs 40,000 (Rs 50,000 for senior citizens) per bank per financial year, with PAN. NRIs are covered by Section 195 which applies the 'rate in force' for non-residents, fixed at 30% by Part II of the First Schedule to the Finance Act 2025, from the first rupee with no threshold. The cess of 4% lifts the effective rate to 31.2%.

Can I claim a refund if my actual tax liability is less than 31.2%?

Yes. File an Income Tax Return in Form ITR-2 by 31 July 2026 for FY 2025-26. The TDS appears in your Form 26AS and Annual Information Statement (AIS). Refund is processed under Section 237 read with Section 244A which also pays interest at 0.5% per month from 1 April of the assessment year until the refund date.

Will furnishing my Tax Residency Certificate automatically reduce TDS?

Not automatically. You must furnish (i) a TRC issued by the foreign tax authority valid for the relevant period, (ii) Form 10F filed electronically on the Income Tax portal under CBDT Notification No. 03/2022 as updated by Notification No. 03/2025 dated 19 February 2025, and (iii) declaration that you have no Permanent Establishment in India. The bank then applies the DTAA rate (12.5% for UAE, 15% for USA / UK / Singapore / Canada) instead of 31.2%.

Is interest on my NRE fixed deposit taxable in India?

No. Section 10(4)(ii) of the Income Tax Act 1961 exempts NRE interest provided you are a person resident outside India under Section 2(w) of FEMA. The exemption ends in the year you return to India and become a resident under Section 6 of the Income Tax Act, although a transitional Resident but Not Ordinarily Resident status under Section 6(6) can preserve some benefits.

What happens if I do not have a PAN?

Section 206AA imposes the higher of the rate in the Act, the rate in force, or 20%. For NRO interest this means 30% plus cess remains the floor. Rule 37BC (CBDT Notification No. 53/2016) exempts non-residents from Section 206AA for interest income if you furnish name, email, address, contact number, TRC, and Tax Identification Number from your country of residence.

Does the new tax regime change anything for NRI FD interest?

The new tax regime under Section 115BAC is concession-light: most chapter VI-A deductions are not available, but the surcharge is capped at 25% on income above Rs 2 crore. NRO FD interest taxed under the special Section 195 rate sits outside the slab structure, so the regime choice mostly affects only the residual Indian-source income that does fall in slabs. Section 80CCD(1B) (the additional Rs 50,000 NPS deduction) is NOT allowed in the new regime — it is available only under the old regime.

Can I avoid TDS by spreading FDs across multiple banks?

No. Unlike Section 194A which applies the threshold per branch, Section 195 has no threshold. Every rupee of NRO interest paid by every bank is subject to the 31.2% deduction at source. Splitting accounts achieves nothing on the TDS front, although it can help with USD 1 million repatriation tracking.

For a deeper view on managing NRI investments end-to-end, see NRI Mutual Fund Investment: FEMA Rules, Gift Mode, and Why Some AMCs Refuse US/Canada NRIs, and the glossary entry for Section 195 gives a quick-reference definition. The practical takeaway for any NRI holding NRO fixed deposits in FY 2025-26: assume a 31.2% upfront cost, pursue treaty relief only if you can produce a clean TRC plus Form 10F, and file an Indian return every year to recover any excess.