Hi,
I'm an Indian citizen (reside in US) and have an NRE account. The interest earned is tax exempt by Indian government. I know I have to report that when filing 1040 form. But how do I reclaim that from IRS saying it's tax exempt as per my country of citizenship,India. India has double tax avoidance treaty with US.

Yes, India has a double tax avoidance treaty with US. Since you are not paying taxes in India, you cannot take advantage of foreign tax credits (there is no double tax). You will have to pay full US taxes on the income.

If you are a U.S. resident, the interest from NRE (non resident external) account is fully taxable in U.S. and you will not get any foreign tax credit.