NRO account tax guide for US expats: what you need to know in 2026

If you are a US citizen or green card holder who maintains an NRO account in India, every rupee of interest earned in that account is subject to tax by both countries. India deducts tax at source before the interest reaches your account. The IRS expects you to report that same interest as ordinary income on your Form 1040.

This guide covers the 2025 tax year, filed during the 2026 filing season. It walks through the Indian TDS mechanics, your IRS reporting obligations, how the US-India tax treaty can reduce your combined tax rate, and what happens if you have not been reporting.

What you’ll learn:

• How India taxes NRO account interest and fixed deposits – and what the actual TDS rate is
• Which IRS forms apply: Schedule B, Form 1116, FBAR, and Form 8938
• How to use the US-India tax treaty and the Foreign Tax Credit to reduce double taxation
• What penalties apply for unreported NRO accounts, and how to catch up

Who this guide is for:

• US citizens and green card holders with NRO savings or fixed deposit accounts in India
• H-1B visa holders and other US tax residents with Indian bank accounts
• NRIs who have not been reporting their NRO accounts to the IRS

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What is an NRO account? Complete definition for US expats and NRIs

An NRO – Non-Resident Ordinary – account is an Indian rupee-denominated bank account that allows NRIs and US-based Indians to deposit income earned in India, but interest earned is subject to Indian TDS and must also be reported to the IRS.

The definition of an NRO account comes down to one thing: it is a rupee-denominated bank account held at an authorized Indian bank, used by non-resident Indians to receive and manage income sourced in India. This includes rental income, pension payments, dividends, and interest.

Key characteristics of an NRO account:

• Currency: Indian rupees only – deposits and withdrawals are in rupees
• Eligible depositors: NRIs, Persons of Indian Origin – PIOs – and Overseas Citizens of India – OCIs
• Source of funds: Income earned in India – salary, rent, dividends, pension – as well as funds transferred from abroad
• Taxability in India: Interest is subject to TDS at 30% plus applicable surcharge and cess under section 195 of the Income-tax Act, 1961, renumbered as section 393(2) of the Income-tax Act, 2025 from April 1, 2026
• Repatriation: Limited – the Reserve Bank of India caps remittances from NRO accounts at USD 1 million per financial year, net of applicable taxes

An NRO account is not the same as an NRE – Non-Resident External – account. The NRE account holds foreign-currency earnings converted to rupees, and its interest is exempt from Indian income tax. NRO interest is always taxable in India. Both accounts must be reported to the IRS if FBAR and FATCA thresholds are met.

NRE vs NRO account: key differences every US expat must know

The single most important difference is that NRE account interest is tax-free in India, while NRO account interest is taxable at a flat 30% plus surcharge and cess – though both accounts must be reported to the IRS if balances cross applicable thresholds.

The most important distinction between NRE and NRO accounts is how India taxes the interest. NRE interest is fully exempt under section 10(4)(ii) of the Income-tax Act, 1961, moved to Schedule IV of the Income-tax Act, 2025 for interest credited on or after April 1, 2026, as long as the account holder qualifies as a “person resident outside India” under FEMA. NRO interest carries a 30% TDS rate from the first rupee.

For US tax purposes, interest from both accounts is taxable as ordinary income on Form 1040. The difference: NRE interest generates no Indian tax to credit against your US tax. NRO interest – because India already taxed it – may qualify for a Foreign Tax Credit on Form 1116.

 

 

How is NRO account interest taxed in India? TDS rates explained

Interest credited to an NRO account is subject to Indian Tax Deducted at Source – TDS – at 30% plus applicable surcharge and 4% health and education cess, and this Indian tax can be claimed as a Foreign Tax Credit on your US return via Form 1116.

The NRO account tax deduction at source is a flat-rate withholding applied by your Indian bank before interest is credited to the account.

Unlike the &sthinsp;₹50,000 threshold, or ₹1 lakh for senior citizens, below which bank interest paid to Indian residents escapes TDS entirely under section 194A, NRO account TDS falls under section 195 and section 393(2) from April 1, 2026, which applies to all payments to non-residents, with no minimum threshold. Your bank deducts tax from the first rupee of interest.

The TDS process works in three steps:

1. Deduction at source. Your Indian bank calculates and withholds 30% plus surcharge and 4% cess on the interest before crediting it to your NRO account. For most NRIs with NRO interest income under ₹50 lakh, the effective rate is approximately 31.2%.
2. TDS certificate. The bank issues Form 16A, a TDS certificate showing the gross interest, the tax deducted, and the rate applied. Keep this document – you will need it to claim the Foreign Tax Credit on your US return.
3. Potential treaty rate reduction. If you submit a Tax Residency Certificate (IRS Form 6166) and Form 10F to your Indian bank before interest is credited, the bank may apply the lower US-India treaty rate of 15% instead of 31.2%. From April 1, 2026, Form 10F has been replaced by Form 41 under India’s Income-tax Act, 2025.

Neither the Union Budget 2025 nor the Budget 2026 changed the 30% base TDS rate on NRO interest for non-residents.

NRO account tax rate: what US persons pay in India and the US

NRO account interest is taxed twice – once by India via TDS and once by the US as ordinary income – but the US-India tax treaty and IRS Form 1116 Foreign Tax Credit can eliminate most or all of the double-tax burden.

The combined rate depends on whether you claim treaty benefits in India and how you use the Foreign Tax Credit in the US:

• Indian TDS rate (domestic law): 30% on the gross interest, plus surcharge and 4% cess. The effective rate is approximately 31.2% for NRO interest income up to ₹50 lakh. The rate applies equally to NRO savings accounts and NRO fixed deposits.
• Reduced rate under the US-India tax treaty: Article 11(2)(b) of the US-India tax treaty caps Indian withholding on interest at 15% for US-resident individuals. The 10% rate in Article 11(2)(a) applies only to interest on loans granted by banks – not to deposit interest earned by individuals. No surcharge or cess is added to the treaty rate.
• US federal income tax: NRO interest is taxed as ordinary income at your marginal rate, reported on Schedule B of Form 1040. Rates range from 10% to 37% for tax year 2025 depending on your total taxable income.
• Foreign Tax Credit (Form 1116): Indian TDS paid on NRO interest can be claimed as a dollar-for-dollar credit against your US tax on that income. The credit is limited to the amount of US tax attributable to the foreign-source income. If you withheld at the domestic 31.2% rate but the treaty limits creditable tax to 15%, only the 15% is creditable in the US – you would need to file an Indian income tax return to claim a refund of the excess.

The tax on an NRO account in India does not change based on whether the account holder lives in the US or abroad. The Indian TDS rate is the same for all non-residents under Indian law, regardless of country of residence.

NRO account tax in the USA: your IRS reporting obligations

As a US person, you must report all NRO account interest as ordinary income on your Form 1040 regardless of whether Indian TDS was withheld, because the IRS taxes US citizens and green card holders on worldwide income.

NRO interest goes on Schedule B of Form 1040. Report the gross amount – the full interest before Indian TDS – converted to US dollars using the IRS yearly average exchange rate or the spot rate on the date of receipt.

Reporting an NRO account to the IRS involves up to four steps:

1. Report interest on Schedule B. List the Indian bank as the payer in Part I. You must also answer the foreign account questions in Part III. This isn’t only required when your total interest and dividends exceed $1,500 – holding a foreign account, including your NRO account, triggers the same requirement regardless of the amount.
2. File an FBAR if aggregate foreign account balances exceed $10,000. If the combined maximum value of all your foreign financial accounts – NRO, NRE, FCNR(B), foreign brokerage, and any others – exceeded $10,000 at any point during the calendar year, you must file FinCEN Form 114 electronically through the BSA E-Filing System.
3. File Form 8938 if FATCA thresholds are met. If the aggregate value of your specified foreign financial assets exceeds the applicable threshold – $200,000 at year-end or $300,000 at any time for single filers living abroad (2025) – you must attach Form 8938 to your Form 1040.
4. Claim the Foreign Tax Credit on Form 1116. Indian TDS deducted on NRO interest can generally be claimed as a Foreign Tax Credit on Form 1116, reducing your US tax liability dollar-for-dollar. NRO interest falls in the passive category for Form 1116 purposes.

FBAR requirements for NRO account holders

Even a single NRO savings account with a balance above the FBAR filing threshold obligates you to file FinCEN Form 114 – and willful failure to file can result in penalties that dwarf the account balance itself.

The FBAR threshold is $10,000 in aggregate across all your foreign financial accounts – not per account. This amount is set by statute and does not adjust for inflation. If you hold an NRO savings account with ₹6 lakh and an NRE account with ₹3 lakh, and the combined USD equivalent exceeded $10,000 at any point during the year, you must file.

The FBAR deadline for tax year 2025 is April 15, 2026, with an automatic extension to October 15, 2026. No extension request is needed. Under the IRS’s FBAR filing requirements, the FBAR is filed separately from your tax return – it does not go to the IRS with your Form 1040.

 

Form 8938 FATCA reporting for NRO accounts

FBAR and Form 8938 are separate requirements with different thresholds – holding an NRO account may trigger both, and filing one does not satisfy the obligation to file the other.

Form 8938 thresholds for tax year 2025 vary by filing status and whether you live inside or outside the US:

 

FBAR and Form 8938 compared:

• FBAR (FinCEN Form 114): Filed with FinCEN (Treasury), not the IRS. Threshold: $10,000 aggregate. Covers foreign financial accounts only.
• Form 8938: Filed with the IRS, attached to Form 1040. Higher thresholds. Covers a broader range of specified foreign financial assets – not just bank accounts.

An NRO account can trigger both. For a detailed comparison, see our guide to FBAR vs Form 8938.

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NRO account repatriation tax: moving money from India to the US

NRO account funds can be repatriated to the US up to USD 1 million per Indian financial year (April–March), net of applicable taxes, but you must obtain a Chartered Accountant certificate and file the required tax declaration forms before the remittance.

The USD 1 million limit applies to the financial year and covers repatriation of both capital (sale proceeds, inheritance, accumulated savings) and current income (rent, dividends, pension, interest) – though current income remitted through the NRO account does not always count against the cap.

The repatriated amount is not separately taxed by the IRS – the underlying income was already reported on your Form 1040 when earned. The transfer itself is a movement of already-reported funds, not new income.

NRO fixed deposit tax: how NRO FD interest is taxed

NRO fixed deposit interest is subject to the same Indian TDS rate as NRO savings account interest – 30% plus surcharge and 4% cess under section 195, section 393(2) from April 1, 2026 – and must also be reported as ordinary income on your US Form 1040.

The TDS rate on NRO FDs is not lower than NRO savings interest. Many NRIs expect a different rate because domestic Indian FDs have different TDS thresholds, but neither section 195 nor its successor, section 393(2), makes any distinction between savings and fixed deposit interest for non-residents.

The US-India treaty rate of 15% applies equally to both NRO savings and NRO FD interest, provided you submit the required documentation (Tax Residency Certificate and Form 10F / Form 41) to your bank before interest is credited.

• TDS: 30% + surcharge + 4% cess (approximately 31.2%), same as NRO savings interest
• US reporting: Ordinary income on Schedule B
• FTC on Form 1116: Creditable, same passive-category treatment as NRO savings interest
• Treaty rate election: Available at 15% with proper documentation

 

 

NRO account tax exemption: what is and is not exempt

There is no blanket NRO account tax exemption for US persons – both India and the US assert taxing rights over NRO interest income, making proper use of the Foreign Tax Credit the primary relief mechanism.

Common misconceptions:

• NRO account interest is NOT exempt from Indian tax. Unlike NRE account interest, NRO interest is always subject to TDS, even if you are a US tax resident. The only reduction available is the treaty rate of 15%.
• NRO account interest is NOT exempt from US tax. The IRS taxes US persons on worldwide income. No exclusion – including the Foreign Earned Income Exclusion – applies to interest income.
• Principal deposits are not separately taxed by the IRS. If you deposit Indian-source salary or rent into your NRO account, the deposit itself is not a taxable event in the US – but the underlying income was already reportable when earned. Only the interest on those deposits creates new taxable income.
• Treaty provisions reduce but do not eliminate Indian withholding. Article 11 of the US-India treaty caps Indian tax on interest at 15% for US-resident individuals. It does not reduce the rate to zero.

See our guide to FATCA exemptions for a separate analysis of which accounts and assets are exempt from Form 8938 reporting.

US-India tax treaty and NRO accounts: reducing double taxation

Invoking the US-India tax treaty for your NRO account requires proactive steps – you must provide your Indian bank with a Tax Residency Certificate and Form 10F before interest is credited, or you will be taxed at the higher domestic rate by default.

The US-India Income Tax Treaty, in force since 1990, contains provisions under Article 11 that cap Indian withholding on interest income paid to US residents:

• Article 11(2)(a): 10% cap on interest arising from loans granted by a bank or similar financial institution. This does not apply to NRO deposit interest.
• Article 11(2)(b): 15% cap on all other interest – including NRO savings and fixed deposit interest earned by US-resident individuals.
• Article 11(3): Exempts interest beneficially owned by governments and central banks. Not relevant to individual NRO holders.

To claim the 15% treaty rate at your Indian bank, you need three documents:

1. Tax Residency Certificate (TRC): For US residents, this is IRS Form 6166, obtained by filing Form 8802 with the IRS. Current processing is running well past the historical 4–6 week estimate – check the IRS’s posted processing status before counting on a specific turnaround, and file as early as your bank’s documentation deadline allows.
2. Form 10F (Form 41 from April 1, 2026): For interest credited before April 1, 2026, this is filed electronically on the Indian income tax e-filing portal under section 90(5) of the Income-tax Act, 1961. For interest credited on or after April 1, 2026, the same declaration is filed as Form 41 under section 159(8) of the Income-tax Act, 2025. Non-residents without a PAN can register under a dedicated category.
3. Self-declaration / Indemnity form: Most Indian banks also require a self-declaration of non-residency status.

If you do not submit these before interest is credited, the bank withholds at 31.2%. You can claim a refund of the excess by filing an Indian income tax return – but this adds time and complexity.

The US-India tax treaty affects more than NRO interest – it also sets reduced rates on dividends, royalties, and specific pension income. See our US-India tax treaty guide for the full income-type breakdown.

The treaty’s saving clause is one detail NRO holders should be aware of: it preserves the US right to tax its own citizens on worldwide income, regardless of any treaty reduction on the Indian side. The treaty reduces Indian tax, not US tax – the Foreign Tax Credit is the tool that handles the US side.

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Penalties for non-compliance: FBAR, FATCA, and unreported NRO income

The IRS and FinCEN impose some of the harshest penalties in the US tax code for unreported foreign accounts – non-willful FBAR violations carry a penalty of up to $16,536 per report (2025), while willful violations can result in the greater of $165,353 or 50% of the account balance at the time of the violation, plus potential criminal prosecution.

FBAR and FATCA penalties operate independently:

FBAR penalties (FinCEN Form 114):

• Non-willful: up to $16,536 per report, per year (for assessments on or after January 17, 2025). This figure has been frozen for 2026 assessments under OMB Memorandum M-26-11.
• Willful: the greater of $165,353 or 50% of the account balance per violation, plus possible criminal prosecution. The Supreme Court’s 2023 Bittner decision confirmed that non-willful penalties apply per report, not per account.

Form 8938 penalties (FATCA):

• $10,000 for failure to file. If the failure continues for more than 90 days after the IRS mails a notice, an additional $10,000 applies for each 30-day period, or part of one, after that 90-day window, up to $50,000 in additional penalties.
• A 40% penalty on any understatement of tax attributable to undisclosed foreign financial assets.

Unreported income penalties:

• Standard accuracy-related and failure-to-file penalties apply to the unreported NRO interest itself, in addition to the FBAR and FATCA penalties.

 

Streamlined filing procedures: catching up on unreported NRO accounts

NRIs who discover they have had unreported NRO accounts for multiple years can often use the Streamlined Foreign Offshore Procedures to file three years of amended returns and six years of FBARs with no miscellaneous offshore penalty – or a 5% penalty if they qualify under the domestic track.

The IRS offers two tracks:

Streamlined Foreign Offshore Procedures (SFOP):

• Penalty: No miscellaneous offshore penalty (0%). Tax and interest on unreported income are still owed.
• Eligibility: You must have been outside the US for at least 330 full days in one of the most recent three tax years, with no US abode maintained during that period. The failure to file must have been non-willful.
• Filings: Three years of delinquent or amended federal returns, six years of delinquent FBARs, and a signed Form 14653 certifying non-willfulness.

Streamlined Domestic Offshore Procedures (SDOP):

• Penalty: 5% miscellaneous offshore penalty on the highest aggregate year-end balance of unreported foreign financial assets over the six-year FBAR period.
• Eligibility: For US residents who do not meet the 330-day non-residency test. The failure must still be non-willful, and you must not be under IRS examination.
• Filings: Three years of amended federal returns (must have originally filed), six years of FBARs, and a signed Form 14654.

Non-willful means you did not report because you did not know, misunderstood the rules, or made an honest mistake – not because you were trying to hide income from the IRS.

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NRO account for US residents: special considerations

A green card holder living in the US who maintains an NRO account in India is a US tax resident subject to worldwide income taxation – every rupee of NRO interest must be reported to the IRS on Form 1040, and there is no de minimis exemption.

This section addresses US residents – including green card holders, H-1B visa holders, and anyone who meets the substantial presence test – who hold NRO accounts. The US reporting rules apply equally to US residents and US citizens abroad:

• Worldwide income: All NRO interest must be reported on Schedule B, regardless of amount
• FBAR and FATCA: The same $10,000 FBAR threshold and Form 8938 thresholds apply. Note that FATCA thresholds for US residents are lower than for filers living abroad: $50,000 year-end / $75,000 any time for single filers (2025)
• Foreign Tax Credit: Available on the same terms – Indian TDS on NRO interest can be credited on Form 1116
• Treaty benefits in India: A US resident who is a treaty resident of the US can claim the 15% treaty rate on NRO interest by submitting the TRC and Form 10F / Form 41 to their Indian bank

 

FATCA and India: how Indian banks report your NRO account to the IRS

Your Indian bank almost certainly already reports your NRO account balance and interest to the IRS through the FATCA IGA – assuming the IRS does not know about your account is one of the most dangerous mistakes an NRI can make.

India signed a Model 1 FATCA Intergovernmental Agreement – IGA – with the United States on July 9, 2015, effective August 31, 2015. Under this agreement, Indian financial institutions identify and report accounts held by US persons to the Central Board of Direct Taxes, which shares the information with the IRS through automatic exchange.

What Indian banks report under FATCA:

• Account holder identity: Name, address, US TIN (Social Security Number or ITIN)
• Account balance: Year-end balance or, for closed accounts, the balance immediately before closure
• Interest and income: Gross interest credited to NRO and NRE accounts during the reporting period
• Reporting timeline: Indian banks report annually to the CBDT, which transmits the data to the IRS under the Competent Authority Arrangement

The practical consequence: if you hold an NRO account and are a US person, the IRS likely already has information about your account through FATCA. Failing to report the account on your FBAR and Form 8938 – or failing to report the interest on your Form 1040 – creates a discrepancy the IRS can flag.

Under the global Common Reporting Standard, India also exchanges financial account information with 100+ other countries – a separate regime from FATCA, but one that further reduces banking secrecy for US-India filers. See our FATCA and CRS reporting guide for how both systems affect NRIs.

NRO account vs other foreign account types: tax comparison for US expats

Among all NRI account types, the NRO account carries the highest combined India-plus-US tax burden on interest income, making it important to use the Foreign Tax Credit and treaty elections to avoid paying tax twice on the same rupees.

 

Common NRO account tax mistakes US expats make

Five mistakes TFX sees repeatedly among US-India filers:

1. Assuming Indian TDS satisfies US tax obligations. It does not. Indian TDS reduces the tax India collects. The US taxes NRO interest separately as ordinary income. The Foreign Tax Credit on Form 1116 bridges the gap – but you must claim it on your return.

2. Failing to aggregate all foreign accounts for the FBAR threshold. The $10,000 FBAR threshold is based on the combined maximum value of ALL foreign accounts – NRO, NRE, FCNR(B), foreign brokerage, even accounts in countries other than India. NRIs who check only their NRO balance may miss the threshold.

3. Not submitting Form 10F to the Indian bank before interest is credited. Without a Tax Residency Certificate and Form 10F (Form 41 from April 2026), your Indian bank withholds at 31.2% instead of the 15% treaty rate. Recovering the excess requires filing an Indian income tax return.

4. Crediting the full Indian TDS when the treaty limits the creditable amount. If your bank withheld at 31.2% but the treaty caps your Indian tax at 15%, the IRS allows a Foreign Tax Credit of only 15%. Claiming 31.2% can trigger an accuracy-related penalty.

5. Repatriating NRO funds without filing Form 15CA/145 and obtaining Form 15CB/146. Indian tax authorities can flag unauthorized remittances. Your bank may refuse to process the transfer without these documents.

Based on a common TFX client scenario, the most expensive NRO account tax mistake is assuming that because TDS was deducted in India, no US filing is required. This misunderstanding has cost clients tens of thousands of dollars in IRS penalties.

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