NRIs: How to save money on taxes when you deposit money in Indian bank accounts?

As per the RBI (Reserve Bank of India) Regulations, an NRI (Non-Resident Indian) can open three types of bank accounts in India – NRE (Non-Resident External) account, NRO (Non-Resident Ordinary) account and FCNR (Foreign Currency Non-Resident) account. Apart from the operational restrictions and flexibilities attached to these bank accounts, the tax rules are also different for the interest income from such accounts. Here is how NRIs can save money on taxes when depositing money in Indian bank accounts:

1. Tax on Interest Income from NRE accounts – As per the current Income tax laws in India, the interest income on NRE FDs is tax-free for the deposit holders. As such, the post-tax yields for NRE FDs become more attractive when compared with other investment options for the NRIs. Additionally, one is not required to make any tax compliances, including ITR filing, if interest income from NRE FDs is the only income they have in India. If NRIs are filing Income Tax Return (ITR) in India due to other taxable incomes, one should disclose the interest income under the Exempt Incomes tab in the ITR.
2. Tax on Interest Income from NRO accounts – While interest income from NRO FDs is taxable in India, an NRI can avail benefits of the provisions of Double Taxation Avoidance Agreements (DTAAs) on such interest income. The Government of India enters into DTAAs with many countries on a reciprocal basis, aiming to mitigate hardships for the taxpayers arising out of double taxation of the same income in different countries. Indian Income tax law provides that the taxpayer can refer to the DTAA provisions at their option. As such, the taxpayer can consider availing the benefits under DTAA if such provisions reduce the overall tax payable in India on such income. Suppose the DTAA provisions require a higher rate of tax to be paid on such interest income. In that case, the taxpayer can ignore the DTAA provision and continue following the regular tax rates under the Income tax law. Further, if any tax has been paid in any other country on such interest income, tax relief can also be claimed by the taxpayer regarding such taxes paid. Accordingly, the overall Indian tax liability gets lowered for the NRIs.
3. Tax on Interest Income from FCNR accounts – The tax provisions for an FCNR deposit are similar to that of the NRE account. The interest income on FCNR deposits is also exempt for NRIs. Since FCNR deposits are denominated in foreign currency, the interest income, for ITR disclosure, should be converted to Indian rupees at the prevailing TT Buying rate. 

As such, NRIs can save on taxes by investing their funds in NRE deposits or FCNR deposits and enjoy tax-free income from such accounts. Further, NRO account holders can also explore benefits under DTAA to lower their tax incidence if such DTAA provisions are beneficial to the taxpayer. 
The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules, as tax benefits are subject to changes due to change in tax laws.