Indian banks withhold tax at an effective 31.2% on every rupee of interest credited to a Non-Resident Ordinary account, and for most NRIs that is far more than the actual tax owed. To avoid TDS on an NRO account, or at least to shrink it to what you truly owe, you have three tools: claim a reduced rate under India’s tax treaty with your country of residence, apply to the Income Tax Department for a nil or lower deduction certificate under Section 197, and file an Indian tax return to recover anything withheld in excess. Most NRIs end up using at least two of them together.
Why the Default Rate Is 31.2%
Section 195 of the Income Tax Act sets a 30% base rate on interest paid to non-residents, and a 4% Health and Education Cess pushes the effective rate to 31.2%. A surcharge applies on top of that if your total Indian income crosses INR 50 lakh. The bank withholds before the money reaches your account and reports every deduction to the government, where it appears on your Form 26AS under your PAN. NRE account interest is exempt from tax entirely and carries no TDS, so if you hold both, only the NRO side triggers this deduction.
Claim the Treaty Rate Before Interest Is Credited
India has Double Taxation Avoidance Agreements with dozens of countries, and most of these treaties cap the tax India can collect on interest at a rate well below 31.2%. If you live in the US, the India-US treaty caps interest withholding at 15% generally and 10% when a bank or similar financial institution pays the interest. NRO fixed deposit interest is paid by a bank, so most US-based NRIs qualify for the 10% rate. Other countries carry their own caps, some at 10% across the board and others at 15%.
The bank will not apply the treaty rate on its own. You have to prove eligibility before the interest is credited, and that means three documents on file with your branch:
- A Tax Residency Certificate from the tax authority in your country of residence. For US residents this is IRS Form 6166, obtained by filing Form 8802 and paying a processing fee.
- Form 10F, a self-declaration under Section 90 covering your foreign address, tax identification number, and residency period. It must be filed electronically through the Indian income tax e-filing portal.
- A valid Indian PAN. Without it, the bank must deduct at the full statutory rate regardless of any treaty.
Submit all three at the start of each financial year in April, or when you open the account. The bank then applies the treaty rate going forward. Miss the window and the bank withholds at 31.2% for the interest already credited, leaving you to chase that money through your return.
Get a Section 197 Certificate to Reduce or Eliminate TDS
A treaty lowers the rate but cannot bring it to zero. The only way to reach a nil deduction, or a rate below what the treaty allows, is a certificate from the Income Tax Department under Section 197. The certificate tells your bank to deduct at a specified lower rate, or not at all, for the remainder of the financial year.
Who Qualifies
The certificate is meant for NRIs whose actual Indian tax liability is lower than what TDS would collect. The most common case is total Indian income that falls below the basic exemption limit. Under the new tax regime, which is the default, that limit is INR 3,00,000 for FY 2025-26, rising to INR 4,00,000 for FY 2026-27 following Budget 2025. If NRO interest of INR 2,50,000 is your only Indian income, your liability is zero under either limit, yet the bank would still withhold over INR 77,000 without a certificate.
You can also qualify when your Indian income exceeds the exemption limit but your final tax bill, after deductions, works out to significantly less than 31.2% of the interest. The assessing officer looks at your projected income from all Indian sources to fix the appropriate rate.
One limit to know: NRIs cannot claim the Section 87A rebate that lets resident Indians pay zero tax on income up to INR 12 lakh under the new regime. Your exemption ceiling is strictly INR 3,00,000, or INR 4,00,000 from FY 2026-27, not the higher effective threshold residents enjoy.
Filing Form 13 on TRACES
Applications go through Form 13 on the TRACES portal (TDS Reconciliation Analysis and Correction Enabling System), not the main e-filing portal. The window for a given financial year opens in February of the preceding year; for FY 2026-27, TRACES accepts applications from February 10, 2026.
You will need to provide:
- A detailed projection of every source of Indian income for the year, including rent, capital gains, and interest from each account.
- Supporting documents such as your previous year’s return and proof of any deductions you intend to claim.
- Your bank’s name, branch address, and TAN (Tax Deduction and Collection Account Number).
Processing usually takes four to six weeks, sometimes longer if the officer requests more information. Once approved, the certificate becomes available on the portal, and you submit it to your bank. The bank must apply the certified rate from the date it receives the document. Certificates expire at the end of the financial year, so renewal is annual.
Timing is what makes this tool work or waste. File in June, get the certificate in August, and the interest credited between April and August has already been taxed at 31.2%. Filing in February or early March for the upcoming year gives you the best chance of having the certificate on file before the first interest credit.
File an Indian Return to Recover Excess TDS
Whatever the bank has already withheld, an Indian income tax return is how you reconcile what was deducted against what you actually owe. It is also your only recourse when the treaty documents or the Section 197 certificate arrive too late.
When You Must File
You are required to file if your gross Indian income exceeds the basic exemption limit, or if you want to claim a refund of excess TDS. The withholding shown in your Form 26AS becomes a credit against your final tax bill, so before filing, check that every deduction the bank made appears there and that the amounts match your bank statements. Mismatches between Form 26AS and your return are the single most common reason refund claims stall.
How the Refund Works
Any TDS credit that exceeds your calculated liability is refundable. If the bank withheld INR 93,600 on INR 3,00,000 of interest but your actual liability is zero, the entire amount comes back. You claim it inside the ITR form when you e-file.
Once the return is processed and verified, the Income Tax Department deposits the refund electronically into the Indian bank account linked to your PAN. Keep an operational Indian account open for this reason; the department does not send refunds abroad or issue paper checks. Section 244A adds simple interest at 0.5% per month, or 6% per year, from the first day of the assessment year to the date the refund is issued. No interest is paid if the refund is less than 10% of the total tax determined for the year.
Processing generally takes a few months, though delays of six months or more happen when the assessing officer flags something. Filing early in the assessment year and answering any notices quickly keeps the timeline as short as it can be.
A Note for US-Based NRIs
Cutting Indian TDS is not the whole picture if you file US taxes. Two things sit next to the Indian side and affect the decision.
First, holding NRO and NRE accounts triggers US reporting. If the combined value of all your foreign financial accounts crosses $10,000 at any point in the calendar year, you must file an FBAR (FinCEN Form 114). Separately, FATCA may require Form 8938 with your federal return, with thresholds that vary by filing status and whether you live in the US or abroad. FBAR and Form 8938 are independent filings with different agencies; meeting one does not exempt you from the other. Penalties for skipping the FBAR alone can reach $10,000 per account per year for non-willful violations, which will outweigh any Indian TDS you saved.
Second, Indian TDS is not lost money on the US side. You can claim it as a foreign tax credit against the US tax on that same interest, using Form 1116 and categorizing the income as passive. If your total creditable foreign taxes for the year are $300 or less, or $600 if married filing jointly, you can skip Form 1116 and claim the credit directly on Form 1040. Convert the Indian tax to dollars using the exchange rate on the date it was withheld, or the average annual rate if you paid throughout the year. If you later receive an Indian refund, that change has to be reported as a foreign tax redetermination.
The credit is capped at the US tax attributable to the foreign income, so a lower Indian rate under the treaty means less cash tied up in India but also a smaller US credit. For most NRIs the cash flow benefit of a 10% treaty rate beats the slightly higher net US tax, but the math depends on your US bracket.