NRE FD vs NRO FD -- Which Fixed Deposit Should You Open?

The most common misconception about NRE and NRO fixed deposits is that you pick whichever one offers the better rate or terms. In practice, FEMA decides for you: an NRE FD can only be funded with money you earned OUTSIDE India, while an NRO FD is where India-sourced income (rent, matured investments, pension, dividends) must go. If your deposit money is genuinely foreign-earned, you can open an NRE FD; if it originated in India, it has to be an NRO FD, regardless of which one has the better tax treatment.

Where a real choice does exist is for NRIs who have BOTH kinds of money -- foreign salary savings they could park in either an NRE FD or convert and treat as domestic. For that money, the tax difference below is decisive.

NRE FD interest is completely exempt from Indian income tax under Section 10(4)(ii) -- zero TDS, zero tax owed, for as long as you remain an NRI. NRO FD interest is taxed under Section 195 at a flat 30% plus 4% cess (31.2% effective), deducted from the very first rupee of interest with no threshold -- a much steeper and less forgiving regime than even a resident's FD interest, which only faces 10% TDS and only above a ₹50,000-₹1,00,000 annual threshold.

On a large deposit, this difference compounds into real money: at a 7% annual interest rate, ₹20 lakh in an NRE FD keeps the full ₹1,40,000 in interest tax-free, while the same deposit in an NRO FD loses roughly ₹43,680 to TDS in that year alone (before any DTAA relief or ITR-time reconciliation).

The 31.2% NRO TDS is a ceiling with no treaty relief claimed, not necessarily your final liability. If your country of residence has a DTAA with India and you file a Tax Residency Certificate plus Form 10F with the bank in advance, NRO interest TDS can drop to the treaty rate -- often 10-15% depending on the country (interest income is where DTAA relief consistently helps; see this site's DTAA guide for why dividends are a more mixed story). Surcharge can also apply above certain income thresholds, which this comparison does not model -- confirm with a CA if your total Indian income is large.