NRE, NRO and FCNR interest, and Indian dividends: what the US return needs

Indian bank deposits are the most common Indian asset of NRIs in America, and the one most often under-reported.

The account types

For a US resident, all of this is interest income. Exempt in India does not mean exempt in the US. The fact that an NRE account is "tax free" is why many people have never reported it.

How it is reported

Add up the interest for the year in dollars, using the average rate, and enter it on Schedule B (Form 1040). Foreign interest is listed by payer. Banks do not send 1099s, so work from the bank's interest certificate. Also complete the foreign accounts question and Part III of Schedule B, and see FBAR and Form 8938.

Interest on cumulative fixed deposits is credited by the bank each year, and US rules generally tax it as it accrues, not at maturity. Do not defer it.

TDS on NRO interest, and the treaty rate

Banks deduct tax at source on NRO interest at the domestic rate of 30% plus surcharge and 4% cess (an effective 31.2% to 35.88%), unless you provide the documents to claim the treaty rate. The India-US treaty limits India's tax on interest to 10% where it is paid on a loan by a bank or similar institution, and 15% otherwise. To use the lower rate, the bank typically needs a Tax Residency Certificate (the IRS issues one on Form 6166), Form 10F (Form No. 41 under the 2026 Rules) and your US tax number. If the bank takes more than the treaty permits, you can recover the excess by filing an Indian return, but you cannot claim the excess as a US credit. The US credit is limited to the amount of Indian tax you were legally obliged to pay.

Dividends

Indian companies' dividends to non-residents are taxed in India at 20% plus surcharge and cess by withholding (the treaty rate for an individual shareholder is 25%, which is higher, so the domestic rate applies in practice). In the US they are reported as dividends on Schedule B. Because India has an income tax treaty with the US that includes information exchange, dividends on Indian shares are generally eligible for the lower qualified dividend rates (0, 15 or 20%), provided you meet the holding period.

Foreign tax credit

The Indian tax on interest and dividends is the main case where the credit works well. On Form 1116, interest and dividends are in the "passive" basket. The credit cannot exceed US tax on that same income, so if India took 30% and the US rate is 24%, the excess is carried back one year or forward ten.

Practical points

• Move or convert idle money. NRO interest at 30% less credit at 15% or less may leave tax cost. Many people shift savings into an NRE or a US account, subject to FEMA rules and their plans.
• Do not forget joint accounts and accounts held with a parent. A joint holder is generally treated as having a financial interest.
• The Indian savings-account interest deduction (Section 80TTA/TTB) has no US equivalent.