Is FCNR interest tax-free in the US?

Where the "tax-free" idea comes from

An FCNR(B) deposit is a term deposit held in a foreign currency, such as US dollars, at a bank in India, open to non-residents. India does not tax its interest while you are a non-resident or not ordinarily resident. Under the Income-tax Act, 1961 the exemption was section 10(15)(iv)(fa), which covers interest paid by a scheduled bank on foreign currency deposits approved by the Reserve Bank of India. For tax years from 1 April 2026, the Income-tax Act, 2025 carries it forward in section 11 and Schedule IV, the schedule of income not included for non-residents and similar persons; entry 14 of that schedule preserves the old section 10(15)(iv)(fa) exemption. Because the interest is exempt, the bank deducts no Indian tax.

That is a statement about Indian tax only. The US decides for itself what it taxes, and it taxes its residents on income from everywhere.

Why the US taxes it

If you are a US citizen, a green card holder, or a visa holder who meets the substantial presence test, you are taxed on your worldwide income. Interest from an Indian bank is ordinary interest income on your Form 1040, at your own federal bracket, in the year it is paid or credited to you. Most states that tax interest tax this too; the federal rule that keeps US Treasury interest out of state tax does not reach a foreign bank deposit.

A tax treaty does not rescue it. IRS Publication 519 explains that most US treaties contain a "saving clause" that preserves the US right to tax its own citizens and residents as if the treaty did not exist.

And there is nothing to credit. The foreign tax credit offsets US tax with foreign income tax you actually paid on the same income. India charged none, so the full US tax is due.

A deposit of $50,000 at 5.0% a year earns $7,881 of interest over 3 years. India taxes none of it while you are non-resident. On a US return, for a single filer with $120,000 of income, each year's interest is taxed at 22.0%, before any state tax. The rate printed on the deposit is a pre-tax rate; for a US resident it compares with a US savings account's pre-tax rate, not with an after-tax one.

Timing: maturity is not the reporting date

Some FCNR deposits pay interest out regularly; others add it to the deposit and pay everything at maturity. For a deposit that compounds and pays at the end, the US may expect the interest to be reported each year as it accrues, not only at maturity. The answer depends on the deposit's terms, so confirm it with a preparer in the first year rather than waiting for the deposit to mature.

It also has to be reported

An FCNR deposit is a foreign financial account. It counts toward the FBAR, which is required once all your foreign accounts together exceeded USD 10,000 at any time in the year (FinCEN), and toward Form 8938 at its higher thresholds. Schedule B of Form 1040 also asks, in Part III, whether you had a foreign account. A deposit held jointly with a parent counts at its full value for you.

How it compares with NRE and NRO

The table summarizes RBI's FAQ on accounts held by non-residents and the incometax.gov.in non-resident help page.

The practical difference: an NRO deposit is taxed twice on paper, but the Indian tax is credited against the US tax, so a US resident's total is roughly the higher of the two. NRE and FCNR interest is taxed once, by the US, in full. A rupee deposit adds currency risk on top: if the rupee falls against the dollar, a high rupee rate can be a much lower dollar return, and US tax is still owed on the interest.

If you move back to India

FCNR interest stays exempt in India while you are not ordinarily resident, and RBI allows the deposit to run to maturity at the contracted rate after you return. Once you become resident and ordinarily resident, new interest is taxed in India. If you are still a US citizen or green card holder at that point, the US keeps taxing it too, and the Indian tax can then be credited.