The NRE (Non-Resident External) account, NRO (Non-Resident Ordinary) account, and FCNR (Foreign Currency Non-Resident) account are the three main bank account types that Non-Resident Indians (NRIs) can use to handle their finances in India.
There is no single investment option that would be suitable for every Non-Resident Indian (NRI).
For NRIs looking to invest their surplus money in India, fixed deposits (FDs) and debt mutual funds can both appear attractive.
FDs offer stable and secure returns, while debt mutual funds provide exposure to fixed-income securities like bonds, treasury bills, commercial papers, etc to provide steady returns, lower risk than equity, and high liquidity with no lock-in period.
From a tax perspective, the comparison between a fixed deposit (FD) and a debt mutual fund depends significantly on the type of bank account used, the investor’s applicable tax rate, investment horizon, liquidity requirements, risk appetite, residential status under FEMA, etc.
But comparing only the headline return is not enough, and the real question is how much do you actually get to keep after taxes?
Best fixed deposits for NRIs
| S.N | Bank Name | 1 – < 2 Year | 2 – < 3 Year | 3 – < 5 Year | 5 Years & above |
| Public sector banks | |||||
| 1 | Bank of Baroda | 6.25%-6.45% | 6.25% | 6.25%-6.30% | 6%-6.30% |
| 2 | Bank of India | 6.50% | 6.60% | 6.25%-6.70% | 6.00% |
| 3 | Bank of Maharashtra | 6.15%-6.65% | 5.25%-6.15% | 5%-5.25% | 5.00% |
| 4 | Canara Bank | 6.25%-6.60% | 6.25% | 6.25% | 6.25% |
| 5 | Central Bank of India | 6.10% | 6.25%-6.7% | 6.00% | 6.00% |
| 6 | Indian Bank | 6.1%-6.80% | 6.15% | 6.05% | 6.00% |
| 7 | Indian Overseas Bank | 6.40%-6.60% | 6.40% | 6.10% | 6.10% |
| 8 | Punjab & Sind Bank | 5.60%-6.85% | 5.85%-6.10% | 5.85% | 5.95% |
| 9 | Punjab National Bank | 6.25%-6.60% | 6.30% | 6.30%-6.35% | 6%-6.35% |
| 10 | State Bank of India | 6.25%-6.45% | 6.40% | 6.30% | 6.05% |
| 11 | UCO Bank | 6.10%-6.45% | 6%-6.10% | 6.00% | 6.00% |
| 12 | Union Bank of India | 6.20%-6.55% | 6.10%-6.15% | 6%-6.10% | 6.00% |
| List of Private Sector Banks in India | |||||
| 1 | Axis Bank Ltd. | 6.25%-6.50 | 6.50% | 6.50% | 6.50% |
| 2 | Bandhan Bank Ltd | 7.00% | 7.45% | 7.25% | 5.85% |
| 3 | CSB Bank | 5%-7.35% | 5.50%-6.50% | 5.75% | 5.75%-6% |
| 4 | City Union Bank Ltd. | 6.50%-7.25% | 6.50% | 6.50%-6.55% | 6.25%-6.55% |
| 5 | DCB Bank Ltd. | 6.90%- 7.10% | 6.90%-7.50% | 7.0%-7.10% | 7%-7.50% |
| 6 | Dhanlaxmi Bank Ltd. | 6.25%-7.1% | 6.25%-6.50% | 6.50%-7.25% | 6.50%-6.60% |
| 7 | Federal Bank Ltd. | 6.25%-6.60% | 6.40% | 6.40%-6.70% | 6.40% |
| 8 | HDFC Bank Ltd | 6.25%-6.45% | 6.45% | 6.40%-6.50% | 6.15%-6.40% |
| 9 | ICICI Bank Ltd. | 6.25%-6.30% | 6.30%-6.45% | 6.45%-6.50% | 6.50% |
| 10 | IDBI Bank Limited | 6.20%-6.45% | 6.25%-6.50% | 6.35% | 5.90%-6.25% |
| 11 | IndusInd Bank Ltd | 6.75%-6.90% | 7.00% | 6.65%-7% | 6.50%-6.65% |
| 12 | IDFC First Bank Ltd. | 6.50%-7.25% | 7.25% | 6.75%-7.25% | 6.0%-6.75% |
| 13 | Jammu & Kashmir Bank Ltd. | 6.55%-6.60% | 6.75%-7.05% | 6.80% | 6.85% |
| 14 | Karnataka Bank Ltd | 6.40%-7.0% | 6.15%-6.40% | 6.15% | 5.50%-6.15% |
| 15 | Karur Vysya Bank Ltd. | 6.55%-6.20% | 6.55% | 6.55% | 6.25%-6.55% |
| 16 | Kotak Mahindra Bank Ltd | 6.35%-6.55% | 6.80% | 6.40% | 6.25% |
| 17 | Nainital Bank Ltd. | NA | NA | NA | NA |
| 18 | RBL Bank Ltd. | 7.00%-7.20% | 7.20% | 7%-7.20% | 6.70% |
| 19 | South Indian Bank Ltd. | 5.85%-6.60% | 5.85%-6.80 | 6.20% | 5.70% |
| 20 | Tamilnad Mercantile Bank Ltd. | 6.60%-7.25% | 7.00% | 6.70% | 6.70% |
| 21 | YES Bank Ltd. | 6.65%-7.25% | 6.90%-7% | 7.00% | 6.75% |
| Note: Data compiled by BankBazaar and has been taken from respective banks’ websites as on 04 Aug 2026 for amounts up to Rs 1 Cr | |||||
FD taxation rules for NRIs
The tax treatment of an FD differs according to whether it is maintained under an NRE, NRO or FCNR(B) account.
“Interest earned on an eligible NRE deposit is exempt from tax in India under Section 11 read with Schedule IV of the Income-tax Act, 2025, corresponding to Section 10(4)(ii) of the Income-tax Act, 1961, provided the account holder satisfies the prescribed FEMA conditions,” said CA (Dr.) Suresh Surana.
“Interest on a qualifying FCNR(B) deposit is also generally exempt, subject to the applicable conditions. Both NRE and FCNR(B) deposits are repatriable, although an NRE deposit is denominated in Indian rupees and therefore exposes the investor to currency fluctuations. An FCNR(B) deposit is maintained in a permitted foreign currency and may therefore be more appropriate where currency protection is a significant consideration,” Surana added.
On the other hand, interest on an NRO fixed deposit is taxable in India, generally under the head “Income from Other Sources”, at the rates applicable to the NRI. Tax is ordinarily deducted at source at the rates in force. The amount deducted by the bank is not necessarily the final tax liability; the NRI may be required to file an Indian income-tax return to determine the actual liability or claim a refund.
Where a Double Taxation Avoidance Agreement (DTAA) provides a more beneficial rate, the taxpayer may claim treaty relief under Section 159 of the Income Tax Act, 2025 (corresponding to section 90 of the Income Tax Act, 1961), subject to furnishing the prescribed documentation, including the Tax Residency Certificate and Form 41 (previously Form 10F).
5 top-performing debt mutual funds in 2026
1-year performance
| Fund | Returns In % |
| Bank of India Credit Risk Dir | 17.66 |
| ABSL Credit Risk Dir | 13.2 |
| DSP Credit Risk Dir | 11.37 |
| ABSL Medium Term Dir | 9.6 |
| ICICI Pru Credit Risk Dir | 9.08 |
3-year performance
| Fund | Returns In % |
| DSP Credit Risk Dir | 16.95 |
| ABSL Credit Risk Dir | 13.27 |
| HSBC Credit Risk Dir | 11.86 |
| ABSL Medium Term Dir | 10.78 |
| Bank of India Credit Risk Dir | 10.07 |
5-year performance
| Fund | Returns In % |
| Bank of India Credit Risk Dir | 27.78 |
| DSP Credit Risk Dir | 13.36 |
| ABSL Medium Term Dir | 12.92 |
| ABSL Credit Risk Dir | 11.02 |
| Bank of India Short Term Income Dir | 10.85 |
Top performing debt fund categories
1-year returns
| Categories | Returns In % |
| Debt: Credit Risk | 8.34 |
| Debt: Liquid | 6.24 |
| Debt: Money Market | 6.17 |
| Debt: Floater | 6.13 |
| Debt: Ultra Short Duration | 6.07 |
3-year returns
| Categories | Returns In % |
| Debt: Credit Risk | 9.07 |
| Debt: Floater | 7.49 |
| Debt: Medium Duration | 7.45 |
| Debt: Target Maturity | 7.42 |
| Debt: Gilt with 10 year Constant Duration | 7.20 |
5-year returns
| Categories | Returns In % |
| Debt: Credit Risk | 9.34 |
| Debt: Medium Duration | 6.56 |
| Debt: Target Maturity | 6.53 |
| Debt: Floater | 6.47 |
| Debt: Money Market | 6.31 |
Source: Value Research as of 10th August 2026
Note: Since credit risk debt funds are the top-performing category across 1, 3 and 5 years, investors should note that credit risk mutual funds carry higher risk than other debt funds as they invest at least 65% of their assets in lower-rated corporate bonds (AA and below) to generate higher returns. In contrast, most debt funds focus on relatively safer government securities and highly rated corporate debt.
Debt fund taxation rules for NRIs
Units purchased on or after 1 April 2023
● All gains are taxed as short-term at your slab rate, no matter how long you hold. There is no long-term rate and no indexation.
● For NRIs, TDS on these gains is deducted at 30% (or slab), subject to DTAA relief. If the UAE NRI provides a Tax Residency Certificate (TRC), then there is no tax on gains
Units purchased before 1 April 2023 (grandfathered)
● These keep long-term capital gains treatment. If held more than 24 months, the gain is taxed at 12.5% (Budget 2024 removed indexation and cut the holding period from 36 to 24 months).
● If held 24 months or less, the gain is short-term and taxed at your slab rate.
Debt mutual funds grandfathering
Grandfathering” means that the new tax treatment introduced for debt mutual funds applies only to units acquired on or after 1 April 2023. In accordance with Section 76 of the Income-tax Act, 2025 (corresponding to Section 50AA of the Income-tax Act, 1961), gains from specified debt mutual fund units acquired on or after this date are treated as short-term capital gains, irrespective of how long they are held. Such gains are consequently taxable at the rates applicable to the investor.
Units acquired on or before 31 March 2023 are grandfathered and remain outside this deemed short-term treatment. Accordingly, where such units are sold or redeemed on or after 23 July 2024, the gain may qualify as long-term capital gain if the prescribed holding period is satisfied i.e. held for more than 24 months for unlisted debt mutual fund units.
Such long-term gains are generally taxable at 12.5% without indexation, plus applicable surcharge and cess. If the required holding period is not completed, the gain is treated as short-term and taxed at the applicable rates.
For instance, debt mutual fund units purchased in March 2023 and redeemed in August 2026 would be eligible for long-term classification, subject to the holding-period requirement.
However, identical units purchased in April 2023 would fall under Section 76 and the entire gain would be treated as short-term, even though they were held for more than three years. Thus, grandfathering protects the classification of older investments, but it does not preserve the earlier indexation benefit for redemptions made on or after 23 July 2024.
DTAA Applicability
Tax-free in India does not mean tax-free in the country where the NRI resides.
“Countries like the USA, UK and Singapore tax residents on worldwide income, so NRE or FCNR interest that India exempts may still be taxable in your country of residence. The UAE, Oman and Qatar levy no personal income tax, so GCC-based clients typically enjoy the India exemption with nothing owed at home,” said Tanvi Kanchan, Associate Director, Anand Rathi Shares & Stock Brokers.
“A UAE Tax Residency Certificate (TRC) allows a UAE-based NRI to invoke the India-UAE Double Taxation Avoidance Agreement (DTAA). Under the residual “other property” clause of this treaty, capital gains from Indian mutual funds can potentially be taxed only in the UAE (where the tax rate is 0%) rather than in India, subject to proper filing,” Kanchan further added.
FD Vs debt mutual funds – Which provides better post-tax returns?
Surana says, let’s assume that an NRI invests Rs. 10 lakh for three years and that:
- NRE and NRO fixed deposits offer 7% annual interest;
- the debt mutual fund earns 8% annually;
- the investor falls in the 30% tax bracket;
- after adding 4% cess, the effective tax rate is 31.2%;
- no surcharge, DTAA benefit, exit load or foreign-country tax is considered; and
- the debt mutual fund investment is made after 1 April 2023 under the growth option.
| Investment | Pre-tax return | Amount after three years | Indian tax | Post-tax amount | Effective post-tax return |
| NRE fixed deposit | 7% | Rs. 12,25,043 | Nil | Rs. 12,25,043 | 7.00% p.a. |
| NRO fixed deposit | 7% | Rs. 12,25,043 | Taxed annually at 31.2% | Rs. 11,51,550 | 4.82% p.a. |
| Debt mutual fund | 8% | Rs. 12,59,712 | Rs. 81,030 | Rs. 11,78,682 | 5.63% p.a. |
The debt mutual fund calculation is as follows:
- Initial investment: Rs. 10,00,000
- Value after three years at 8%: Rs. 12,59,712
- Capital gain: Rs. 2,59,712
- Tax at 31.2%: Rs. 81,030
- Post-tax redemption amount: Rs. 11,78,682
Based on the stated assumptions, the NRE fixed deposit provides the highest post-tax amount. It exceeds the debt mutual fund by approximately Rs. 46,361 since its entire 7% return is exempt from tax in India. The debt mutual fund earns a higher pre-tax return of 8%, but taxation of the gain reduces its effective post-tax return to approximately 5.63%.
The debt mutual fund performs better than the NRO fixed deposit by approximately Rs. 27,132. This is because it earns a higher pre-tax return and the tax is deferred until redemption, allowing the full investment to compound during the three-year period. In comparison, annual taxation reduces the NRO fixed deposit’s effective return to approximately 4.82%.
Accordingly, the NRE fixed deposit offers the best post-tax outcome where the investor is eligible to invest through an NRE account and prioritises predictable returns. The debt mutual fund may be preferable to an NRO fixed deposit where the investor is willing to accept market risk for a potentially higher return.
However, the debt fund’s 8% return is market-linked and not guaranteed, whereas the FD returns are predetermined (based on the period of investment, which may range between 6 to 7%). Therefore, the debt fund may be considered by an investor willing to accept additional risk, while the NRE FD may be more suitable for predictable, tax-efficient and stable returns.
Further, these results represent the Indian tax position only. The NRI’s country of residence may tax NRE interest and mutual fund gains under its worldwide-income rules. The applicable tax treaty, foreign tax credit, exchange-rate movement and the investor’s actual Indian tax bracket should therefore be considered before making the final decision.
Conclusion
A debt fund thus provides a timing advantage because tax generally arises only when the units are redeemed or transferred. On the other hand, FD interest is ordinarily taxable as it accrues or is credited during the tenure of the deposit.
The deferral available in a growth-option debt fund permits the amount to remain invested until redemption, although the eventual gain may still be taxable at the applicable rate.
Accordingly, an eligible NRE or FCNR(B) deposit may be preferable where predictable returns, capital stability and tax-exempt Indian income are the principal objectives. Debt mutual funds may be considered where liquidity, diversification and potential returns justify the additional risk.
A combination of both may often be appropriate. The final comparison should be based on the aforementioned investment factors, post-tax returns in India, repatriation requirements and taxation in the NRI’s country of residence, since income exempt in India may still be taxable overseas.
Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions.
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