FCNR interest is not tax-free if you live in the US

FCNR(B) interest is tax-free in India, and only in India. A US citizen, a green card holder or a visa holder who passes the substantial presence test reports it on Form 1040 like any other interest, at the federal bracket, and pays state income tax on it where the state has one. On $50,000 (₹47,90,500 at ₹95.81 per $1) in a dollar FCNR deposit at 3.75% for two years, the interest is $3,800. India takes $0. The US federal and a 5% state tax take $1,102, so the deposit keeps 2.66% a year, not 3.75%.

The numbers

The inputs: $50,000 for two years; a single filer with $145,000 of income, so the next dollar of interest is taxed at 24% federal; 5% state tax; FCNR at 3.75%; a US savings account at 4%; a 26-week Treasury bill at a 4.37% coupon-equivalent yield (the Treasury's quote for 29 September 2026, which the engine turns into a 4.42% yearly yield). Interest is credited each year, taxed that year, and what is left stays in the deposit. The engine is MoneyVibe's NRE, NRO and FCNR comparison, which uses the 2026 federal brackets.

The FCNR line carries $0 of Indian tax and $1,102 of US federal and state tax: $1,875 of interest in year one, taxed at 29% for $544, and $1,925 in year two, taxed for $558. The bill ends ahead for two reasons: it pays more, and interest on US Treasury obligations is exempt from state tax, while interest from a bank, in India or the US, is not.

What a higher rate would do, as what-ifs rather than quotes:

The break-even is easy to state. Against a US savings account at 4%, an FCNR deposit has to pay more than 4.00% to come out ahead, because both are taxed the same way. Against the T-bill it has to pay about 4.73% at these inputs.

Why it works this way

India. The Income-tax Act, 2025, in force from 1 April 2026 in place of the Income-tax Act, 1961, lists income left out of the total income of non-residents in Schedule IV, brought in by section 11. Serial 14 of that schedule keeps, among other exemptions, the one in section 10(15)(iv)(fa) of the 1961 Act, "subject to the conditions as specified therein". Secondary sources describe that clause as covering interest on approved foreign currency deposits with a scheduled bank, for non-residents and RNOR individuals; the 1961 text itself could not be read at an official source. The Reserve Bank of India's FAQ on non-resident accounts says the income earned in NRE and FCNR(B) accounts is exempt from income tax. Nothing is deducted, so there is no Indian tax to carry to the US.

The US. A resident alien is taxed on worldwide income, the same as a citizen (IRS Publication 519). Foreign-source interest goes on the return whether or not a Form 1099 arrives (Publication 550, written for citizens; Publication 519 applies the same worldwide-income rule to resident aliens). The India-US treaty does not change that: Article 1(3) lets each country tax its own residents and citizens as if the treaty had not come into effect, the "saving clause". The foreign tax credit on Form 1116 offsets US tax with foreign income tax actually paid; India charged none, so the full US tax is due. State tax comes on top in states that have an income tax.

Reporting. An FCNR deposit is a time deposit at a foreign financial institution. It counts toward the FBAR once all your foreign accounts together exceeded $10,000 at any time in the year, and toward Form 8938 above $50,000 at year end or $75,000 at any time for an unmarried filer living in the US ($100,000 and $150,000 on a joint return).

Timing. IRS Publication 550 says interest that is credited to your account and can be withdrawn is taxable. If you withdraw early and pay a penalty, you still report the interest credited without subtracting the penalty. For a deposit that defers its interest beyond one year, Publication 550 points to the original issue discount rules, which count interest as it accrues. Whether a cumulative FCNR deposit that pays everything at maturity falls there depends on its terms. Ask a US preparer in the first year, not at maturity.

Where the tax-free idea goes wrong

Four readings come up again and again, and each fails at a different step.

• "Exempt in India means exempt." The exemption is India's decision about India's tax. The US decides separately what it taxes, and it taxes its residents on income from everywhere.
• "The treaty fixes it." For a US resident the saving clause keeps the US right to tax, so the treaty is no help on this interest. It matters for NRO interest, where India does tax, and that is a different post.
• "No Form 1099 came, so nothing to report." The IRS rule is that foreign-source interest is reportable whether or not a Form 1099 arrives from the payer.
• "A dollar deposit has no risk." It has no rupee risk, which is its real advantage over NRE and NRO. Its other risks are the bank's and the interest rate's, and none of them is a tax.

What changes the answer

• Your bracket and your state. The same deposit keeps 3.11% a year on $60,000 of income (12% federal), 2.66% on $145,000 (24%) and 2.22% on $250,000 (32% plus the 3.8% net investment income tax). At $145,000, a state with no income tax lifts it to 2.85%; a 9% state lowers it to 2.51%.
• What you compare it with. A dollar deposit is not exposed to the rupee, which is its real advantage over NRE and NRO. Against a US account, only the rate after tax matters, and the state treatment of Treasuries can decide it.
• The term. RBI's table gives FCNR(B) terms of one to five years. A rate fixed for the term is a gain if US rates fall and a miss if they rise.
• Where you live later. RBI's FAQ lets an FCNR(B) deposit run to maturity at the contracted rate after you return to India. India's exemption applies to non-residents and, as reported in secondary sources, to not ordinarily resident (RNOR) individuals; once you become resident and ordinarily resident, new interest is taxed there. If you are still a US citizen or green card holder, the US keeps taxing it too and the Indian tax can then be credited. See what RNOR means.

Not modeled: the bank's compounding convention (rates are treated as yearly yields), early-withdrawal penalties, deposit insurance, and borrowing against the deposit.

What to do first

1. List each FCNR, NRE and NRO deposit with its currency, rate, how interest is paid and its maturity date.
2. Put the after-US-tax figure next to your US alternative in the NRE, NRO and FCNR calculator. The reference version of this answer is at Is FCNR interest tax-free in the US?.
3. Add each deposit's highest balance to the FBAR and Form 8938 checker, and ask the bank for interest by calendar year, not only by Indian financial year.

This is step 2 of 6 in Money in two countries; the calculator above runs your own numbers.

Not tax or legal advice. Indian rules as published on 2 October 2026; check with a Chartered Accountant before acting.