Tax

Foreign Interest Income on a U.S. Return: Savings, Fixed Deposits, and NRE/NRO Accounts

Interest on accounts abroad is taxable to a U.S. resident even when it is tax-free at home. How NRE, NRO, FCNR, and fixed deposit interest is reported, when the foreign tax credit applies, and how the accounts hit FBAR and Form 8938.

By Girija Srinivasan, CA4 min · 5 slidesUpdated November 8, 2026

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Worldwide Income Means Worldwide Interest

A U.S. tax resident (citizen, green card holder, or someone who meets the substantial presence test) reports interest from every account, in every country, on Schedule B.
Exempt at home does not mean exempt here. NRE account interest is tax-free in India; a UK ISA and a Canadian TFSA are tax-free at home. All three are fully taxable on the U.S. return.
Report in U.S. dollars. The IRS accepts a reasonable, consistently applied exchange rate; most preparers use the yearly average rate published by the IRS or Treasury for income and the year-end rate for account balances.
Interest credited to the account counts even if you never withdrew it, including interest on a fixed deposit that compounds until maturity.
Schedule B, Part III also asks whether you had a foreign account and whether you filed an FBAR; answering it wrongly is its own problem.

NRE, NRO, and FCNR, Line by Line

NRE (Non-Resident External) accounts hold money brought into India from abroad. Interest is exempt in India, so there is no Indian tax and no foreign tax credit; the full amount is taxable in the U.S.
NRO (Non-Resident Ordinary) accounts hold income earned in India such as rent, dividends, or pension. Indian banks deduct tax at source on the interest; that tax is creditable on Form 1116 in the passive income basket.
FCNR deposits are held in a foreign currency and the interest is exempt in India; U.S. treatment follows NRE, fully taxable with no credit.
Fixed deposits inside any of these accounts are still accounts: their peak balances count toward the FBAR and Form 8938 thresholds, and accrued interest is reported each year.
A resident savings account you kept after moving to the U.S. should normally be redesignated as NRO under Indian exchange-control rules; your Indian CA handles that, we report the interest either way.

Foreign Tax Credit Mechanics

Form 1116 credits foreign income tax actually paid or accrued against the U.S. tax on the same income, basket by basket. Bank interest sits in the passive basket.
The credit is limited to the U.S. tax attributable to that foreign income, so a 30% Indian deduction on NRO interest will not all come back in a year when your U.S. marginal rate on it is lower; the excess carries forward ten years.
A refund you later claim in India by filing an Indian return reduces the creditable amount; the credit is for tax finally owed, not tax withheld.
Below $300 of creditable foreign tax ($600 joint), all passive, you can claim the credit without Form 1116, but the simplified election also forgoes carryovers.
Treaty rates matter: the India-U.S. treaty caps Indian tax on interest paid to a U.S. resident; your Indian CA uses Form 10F and a tax residency certificate to get the bank to withhold at the treaty rate.

The Reporting Stack Around the Interest

FBAR (FinCEN 114): required when all foreign accounts together exceeded $10,000 at any time in the year, counting the maximum balance of each account.
Form 8938: required above $50,000 at year end or $75,000 at any time for a single filer living in the U.S., double for joint filers; higher thresholds abroad.
Joint accounts with parents abroad count in full for FBAR purposes even if you consider the money theirs; signature authority alone can trigger the filing.
Forms 1099-INT do not exist for foreign banks; you build the interest figure from statements, so keep year-end and peak-balance statements for every account.
Missed years: delinquent FBAR submission where the interest was reported; Streamlined Filing Compliance Procedures where it was not.

Common Mistakes

Leaving NRE interest off because it is tax-free in India. It is the single most common cross-border omission we see.
Netting Indian TDS against U.S. tax without Form 1116, or claiming the full withholding when a later Indian refund reduced the tax actually paid.
Converting at a single year-end rate for everything; income uses an average or transaction-date rate, balances use year-end.
Ignoring accounts under $10,000 individually when the aggregate crosses the FBAR line.
Need help? Foreign interest reporting is part of every cross-border tax engagement at Rubric Financial, coordinated with your accountant abroad so both returns tell the same story.

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Educational content, not tax, legal, or accounting advice. Confirm with a CPA before acting.

Frequently asked questions

Is NRE account interest taxable in the U.S.?

Yes. NRE interest is exempt from Indian tax, but a U.S. tax resident reports worldwide income, so the interest is fully taxable on the U.S. return with no foreign tax credit to offset it, because no Indian tax was paid. Report it on Schedule B in U.S. dollars using a consistent exchange rate, and count the account toward your FBAR and Form 8938 thresholds.

Can I claim the TDS deducted on my NRO interest on my U.S. return?

Yes, as a foreign tax credit on Form 1116 in the passive basket. The credit is limited to the U.S. tax on that income, so part of a 30% Indian deduction may carry forward rather than come back in the current year. If you later file an Indian return and receive a refund of some of that TDS, the creditable amount is the tax finally owed in India, not the amount withheld.

Do fixed deposits count as accounts for FBAR purposes?

Yes. A fixed deposit held at a foreign bank is a financial account, whether it sits inside an NRE, NRO, or resident account relationship. Its highest balance during the year counts toward the $10,000 aggregate FBAR threshold and toward Form 8938, and the interest credited each year is taxable even if it compounds until maturity.

What exchange rate should I use for foreign interest?

The IRS accepts any reasonable rate applied consistently. In practice, income is converted at the yearly average rate the IRS or Treasury publishes, or at the rate on the date received, and account balances for FBAR and Form 8938 are converted at the Treasury year-end rate. Document the source so the same method is used every year.

I kept my regular Indian savings account after moving to the U.S. Is that a problem?

Under Indian exchange-control rules a resident account should be redesignated as NRO once you become a nonresident of India; that is an India-side step your Chartered Accountant handles. On the U.S. side the treatment is unchanged: report the interest, count the account toward FBAR and Form 8938, and credit any Indian tax deducted on Form 1116.

Accounting

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Foreign Interest Income on a U.S. Return: Savings, Fixed Deposits, and NRE/NRO Accounts

Worldwide Income Means Worldwide Interest

NRE, NRO, and FCNR, Line by Line

Foreign Tax Credit Mechanics

The Reporting Stack Around the Interest

Common Mistakes

Frequently asked questions

Is NRE account interest taxable in the U.S.?

Can I claim the TDS deducted on my NRO interest on my U.S. return?

Do fixed deposits count as accounts for FBAR purposes?

What exchange rate should I use for foreign interest?

I kept my regular Indian savings account after moving to the U.S. Is that a problem?

Accrual Accounting: When to Switch From Cash Basis

When Does a Small Business Need a Fractional CFO?

Month-End Close Checklist for Small Businesses

Want a CPA to own your filings?

Foreign Interest Income on a U.S. Return: Savings, Fixed Deposits, and NRE/NRO Accounts

Worldwide Income Means Worldwide Interest

Frequently asked questions

Is NRE account interest taxable in the U.S.?

Can I claim the TDS deducted on my NRO interest on my U.S. return?

Do fixed deposits count as accounts for FBAR purposes?

What exchange rate should I use for foreign interest?

I kept my regular Indian savings account after moving to the U.S. Is that a problem?

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Accrual Accounting: When to Switch From Cash Basis

When Does a Small Business Need a Fractional CFO?

Month-End Close Checklist for Small Businesses

Want a CPA to own your filings?