Tax on FD investments gets tricky if you're a US taxpayer with fixed deposits in India. The United States taxes individuals based on their US person status rather than residence. This means you must report worldwide income on your US tax return even if you've paid taxes in India already. The IRS takes an aggressive compliance approach. Failure to report your Indian FDs may result in heavy fines and penalties.
You must disclose your fixed deposits on international reporting forms, namely FBAR and FATCA. Understanding tax on FD in India versus tax on FD in USA helps you stay compliant and avoid expensive mistakes. This piece walks you through US tax treatment of Indian fixed deposits and the specific reporting requirements you need to meet.
Key Takeaway
If you're a US taxpayer holding Indian Fixed Deposits, you must treat them as fully reportable and taxable - even if India doesn’t tax them.
- All Indian FD interest is taxable in the US, including NRE, NRO, and FCNR deposits - even if tax-free in India.
- Interest is taxed annually on an accrual basis, not just at maturity or withdrawal.
- You must report FDs on FBAR and possibly Form 8938 if your foreign balances cross reporting thresholds.
- NRO TDS can be claimed as a foreign tax credit using Form 1116 to avoid double taxation.
- Non-compliance can trigger heavy IRS penalties, even if no additional tax is due.
Understanding Indian Fixed Deposits (FDs)
A Fixed Deposit locks your money with a financial institution for a predetermined period at a guaranteed interest rate. Banks and NBFCs in India offer FD tenures ranging from 7 days to 10 years. You deposit a lump sum amount. The institution pays you interest higher than regular savings accounts.
Interest calculation varies based on tenure. FDs shorter than 6 months use simple interest, while longer tenures apply compound interest. To cite an instance, see depositing Rs. 1,00,000 for 5 years at 10% that yields Rs. 1,50,000 with simple interest but Rs. 1,61,051 with compound interest.
As a US taxpayer, you access three specific FD types. NRE (Non-Resident External) Fixed Deposits accept foreign income converted to rupees and remain tax-free in India. Both principal and interest are repatriable. NRO (Non-Resident Ordinary) Fixed Deposits hold India-sourced income like rent or dividends. Interest faces 30% TDS plus surcharge and cess, with principal being non-repatriable. FCNR (Foreign Currency Non-Resident) deposits maintain your foreign currency exposure and offer tax-free returns in India.
Tax on FD in India depends on your account type. NRE and FCNR accounts escape Indian taxation, but NRO accounts attract standard resident tax rates. Your tax on FD in USA follows different rules, requiring you to report all three types on your US return whatever the Indian tax treatment.
US Tax Treatment of Indian Fixed Deposits
US tax residents face taxation on worldwide income whatever their residence. The IRS taxes your Indian FD interest even if you never withdraw it or if India exempts it from taxation.
Tax on FD in India applies upon maturity or withdrawal. Tax on FD in USA follows accrual-based taxation instead. The IRS taxes your interest income as it accrues each year rather than waiting for distribution. You cannot defer taxation by rolling over FDs or reinvesting interest.
Fixed deposits with terms exceeding one year receive Original Issue Discount treatment. The IRS prevents artificial tax avoidance by requiring annual reporting of accrued interest instead of allowing gross-up taxation at maturity.
Your NRE account interest remains tax-free in India but becomes taxable on your US return. The same applies to NRO and FCNR deposits. Interest income faces ordinary income tax rates up to 37% rather than preferential capital gains rates.
You can offset double taxation through foreign tax credits. Indian TDS deducted from your NRO account qualifies as creditable foreign tax. You choose between claiming foreign taxes as credits or itemized deductions. Credits reduce your US tax liability dollar-for-dollar and are more beneficial than deductions. Complete Form 1116 to claim the foreign tax credit and prevent paying tax twice on similar income.
US Reporting Requirements for Indian Fixed Deposits
You face mandatory disclosure obligations on top of tax on FD in USA. Two separate forms capture your Indian fixed deposits: FBAR and Form 8938.
File FBAR when combined foreign account values exceed $10,000 at any point during the calendar year. This threshold applies to combined balances across all foreign accounts including savings and checking, plus each FD. You must report every fixed deposit rather than consolidating them. FBAR requires the maximum account value during the year, account numbers and financial institution details. The form goes to FinCEN by April 15 with automatic extension to October 15.
Form 8938 attaches to your annual tax return with higher thresholds. Single filers living in the US must file if foreign assets exceed $50,000 on year-end or $75,000 anytime during the year. Married couples filing jointly face $100,000 and $150,000 thresholds. US persons abroad get much higher limits: $200,000 year-end or $300,000 peak for singles, and double that for joint filers.
Both forms may require reporting similar accounts. Penalties reach $10,000 for first FBAR violations and up to $60,000 total for Form 8938 non-compliance. Each fixed deposit counts as a separate reportable account that demands disclosure.
Conclusion
Your Indian fixed deposits create dual obligations as a US taxpayer. The IRS taxes all FD interest annually, whatever the Indian tax treatment. You must disclose each account on FBAR and Form 8938 when thresholds apply. Foreign tax credits help prevent double taxation on your NRO deposits. Stay compliant by reporting your FDs on your tax return and filing international forms before deadlines. This avoids substantial penalties.
Frequently Asked Questions
How is interest from fixed deposits taxed in the United States?
Fixed deposit interest is treated as ordinary income for U.S. federal tax purposes. It's taxed in the year it accrues, regardless of whether you withdraw it or not. This means you'll pay tax at your regular income tax rates, which can be as high as 37%, rather than at preferential capital gains rates.
Do I need to pay U.S. taxes on income earned in India?
Yes, if you're a U.S. citizen, green card holder, or resident alien, you must pay U.S. taxes on your worldwide income, including income earned in India. This applies regardless of where you live or whether you've already paid taxes in India on that income.
Are there different tax implications for NRE and NRO fixed deposits in the U.S.?
While NRE fixed deposits are tax-free in India and NRO deposits face 30% TDS in India, both types are fully taxable in the United States. The IRS requires you to report interest from all types of Indian fixed deposits on your U.S. tax return, regardless of their tax treatment in India.
Can I avoid double taxation on my Indian fixed deposits?
Yes, you can claim foreign tax credits to offset double taxation. If you've paid taxes in India (such as TDS on NRO accounts), you can use Form 1116 to claim these as credits against your U.S. tax liability. This reduces your U.S. taxes dollar-for-dollar, which is more beneficial than claiming them as deductions.
What reporting requirements apply to Indian fixed deposits held by U.S. taxpayers?
You must file FBAR if your combined foreign account balances exceed $10,000 at any time during the year. Additionally, you may need to file Form 8938 with your tax return if you meet higher thresholds ($50,000 year-end or $75,000 anytime for single filers in the U.S.). Each fixed deposit must be reported separately on these forms.
About the Author
By Prakash
CEO & Founder of InvestMates
Prakash is the CEO & Founder of InvestMates, a digital wealth management platform built for the global Indian community. With leadership experience at Microsoft, HCL, and Accenture across multiple countries, he witnessed firsthand challenges of managing cross-border wealth. Drawing from his expertise in engineering, product management, and business leadership, Prakash founded InvestMates to democratize financial planning and make professional wealth management accessible, affordable, and transparent for every global Indian.
