When an NRI returns to India, the taxation of bank interest does not depend only on the name of the account. It also depends on the person's residential status under the Income-tax law, residential status under the Foreign Exchange Management Act (FEMA), the type of deposit and the date on which the status changed.

Residential status after returning to India

A returning Indian may be classified under the Income-tax law as:

• Non-Resident (NR)
• Resident but Not Ordinarily Resident (RNOR) 
• Resident and Ordinarily Resident (ROR)

This status is determined separately for each financial year or tax year using the number of days spent in India and the person's residential history. A person does not automatically become ROR merely because they have returned to India.

Under FEMA, however, a person who returns to India to take up employment, conduct business or stay for an uncertain period may become a person resident in India from the date of return. A temporary visit to India may not result in the same change.

Quick summary of the tax treatment

1. Interest earned on an NRO account

Interest earned on a Non-Resident Ordinary Rupee Account is taxable in India. There is no separate exemption merely because the account holder is an NRI, RNOR or returning Indian.

• The interest is normally reported under Income from Other Sources.
• The final tax is calculated at the applicable rates based on the taxpayer's total income and chosen tax regime.
• When the account holder is treated as a non-resident, the bank generally deducts TDS under section 195.
• The standard non-resident TDS rate on bank-deposit interest is generally 30%, plus applicable surcharge and cess, unless a lower treaty rate is available.
• TDS is not necessarily the final tax. Excess TDS may be claimed as a refund by filing the applicable ITR.

After returning to India and becoming resident under FEMA, the account holder should ask the bank to redesignate the NRO account as an appropriate resident account. The interest remains taxable after redesignation.

2. Interest earned on an NRE account

Under section 10(4)(ii) of the Income-tax Act, 1961, interest on an NRE account is exempt where the individual is a person resident outside India under FEMA or has been permitted by the RBI to maintain the account.

For Tax Year 2026-27 onwards, the exemption continues under section 11 read with Schedule IV, Serial Number 1 of the Income-tax Act, 2025. The new Act has not withdrawn the exemption.

RBI guidance requires NRE accounts to be redesignated as resident accounts or transferred to an eligible RFC account immediately when the account holder returns to India for employment or otherwise becomes resident under FEMA.

Therefore, interest attributable to the period during which the person remained eligible to maintain the NRE account may be exempt. Interest arising after the person becomes resident under FEMA should not automatically be treated as exempt.

3. Interest earned on an FCNR(B) deposit

An FCNR(B) deposit is maintained in an approved foreign currency with an authorised bank in India. Interest on a qualifying foreign-currency deposit is exempt under section 10(15)(iv)(fa) of the Income-tax Act, 1961 where the recipient is:

• a non-resident; or
• an individual or HUF that is Resident but Not Ordinarily Resident.

The exemption continues under the Income-tax Act, 2025 through section 11 read with Schedule IV, Serial Number 14, subject to the conditions of the corresponding provision under the 1961 Act.

RBI permits an existing FCNR(B) deposit to continue until its original maturity at the contracted rate even after the depositor returns to India. At maturity, it should generally be converted into a resident rupee deposit or an eligible RFC account.

However, permission to continue the deposit does not itself guarantee a tax exemption. If the account holder becomes ROR under the Income-tax law, the FCNR interest becomes taxable even if the deposit is allowed to continue until maturity.

4. Interest earned on an RFC account

A Resident Foreign Currency account enables an eligible returning Indian to retain permitted foreign-currency funds in India without immediately converting them into Indian rupees.

Interest on a qualifying RFC deposit is generally exempt while the account holder is RNOR under section 10(15)(iv)(fa), provided the deposit is with a scheduled bank and satisfies the applicable RBI-approved foreign-currency deposit conditions.

Once the person becomes ROR, interest on the RFC deposit becomes taxable under Income from Other Sources at the applicable rates.

Income-tax Act, 1961 and Income-tax Act, 2025 comparison

Example

Suppose an individual returns permanently to India during Tax Year 2026-27 and qualifies as RNOR under the Income-tax law.

• NRO interest of ₹80,000: Taxable in India.
• NRE interest: Exempt only for the eligible period during which the FEMA and RBI conditions were satisfied. The NRE account should be redesignated or transferred after the FEMA status changes.
• FCNR interest of ₹1,20,000: Generally exempt while the individual remains RNOR and the qualifying deposit conditions are satisfied.
• RFC interest of ₹90,000: Generally exempt during RNOR status. It becomes taxable when the individual becomes ROR.

How to report the interest in the ITR

• Report taxable NRO, resident-account, FCNR or RFC interest under Income from Other Sources.
• Report exempt NRE, FCNR or RFC interest in the applicable exempt-income schedule of the ITR.
• Claim eligible TDS appearing in Form 26AS, AIS and the bank's TDS certificate.
• Do not omit taxable interest merely because the bank did not deduct TDS.
• Use the correct residential status—NR, RNOR or ROR—in the return.

Documents to retain

• Passport and travel history;
• Residential-status computation;
• Bank interest certificates;
• NRE, NRO, FCNR and RFC account statements;
• Letters confirming redesignation or conversion of accounts;
• Form 16A, Form 26AS and AIS records; and
• Tax Residency Certificate and Form 10F where a DTAA benefit is claimed.

Practical steps after returning to India

1. Calculate your Income-tax residential status for the relevant year.
2. Determine the date on which your FEMA residential status changed.
3. Inform each bank about your return to India.
4. Redesignate the NRE and NRO accounts or transfer eligible funds to an RFC account.
5. Decide whether an existing FCNR deposit should continue until maturity or be converted.
6. Obtain separate interest certificates for taxable and exempt periods wherever necessary.
7. Reconcile the interest and TDS with AIS and Form 26AS before filing the ITR.

Conclusion

NRO interest remains taxable regardless of whether the returning individual is NR, RNOR or ROR. NRE interest is exempt only while the FEMA and RBI eligibility conditions are met. Qualifying FCNR and RFC interest is generally exempt for an NR or RNOR but becomes taxable when the individual becomes ROR.

Since FEMA status and Income-tax residential status follow different tests, the date of return, purpose of return, travel history and account-conversion records should be reviewed before claiming an exemption.

For Assisted Service, please WhatsApp us on +91-9320546101 or raise a support ticket here