For Non-Resident Indians (NRIs) with financial interests in both India and the United States, navigating tax compliance can be complex. Dual taxation, different fiscal years, reporting rules, and penalties make it essential to understand both Indian and US tax laws.
This guide provides a complete overview of NRI tax filing requirements in both the US and India, reporting obligations, deadlines, exemptions, and tips for compliance.
Who is an NRI?
Before diving into tax requirements, it is crucial to determine residential status:
As per Indian Income Tax Act:
An individual is considered an NRI if they meet either of these conditions:
| Condition | Criteria |
|---|---|
| Stay Duration | Less than 182 days in India in a financial year |
| Combined Stay | Less than 60 days in a year and less than 365 days in the previous 4 years |
As per US IRS (for Green Card holders or residents):
A person is a US tax resident if they meet:
- Substantial Presence Test (31 days in the current year and 183 days over 3 years)
- Green Card Test: Holding a lawful permanent resident status at any point during the year.
Tax Filing Requirements in the United States for NRIs
The US taxes its residents and citizens on their worldwide income regardless of where they live.
1. Income Reporting
US NRIs must report:
- Income earned in India (rent, interest, capital gains)
- Global bank accounts and investments
- Business or employment income abroad
2. Important Forms to File
| Form | Purpose |
|---|---|
| Form 1040 | Annual individual tax return |
| FBAR (FinCEN 114) | For foreign bank accounts exceeding $10,000 |
| FATCA (Form 8938) | For foreign financial assets over threshold limits |
| Form 1116 | Claim foreign tax credit |
| Form 2555 | Exclude foreign earned income (if applicable) |
3. Foreign Tax Credit
NRIs in the US can avoid double taxation by:
- Claiming foreign tax credit on income taxed in India
- Using the India-US Double Taxation Avoidance Agreement (DTAA)
4. Tax Deadlines (US)
| Filing Category | Deadline |
|---|---|
| Individual Return (Form 1040) | April 15 (or October 15 with extension) |
| FBAR | April 15 (automatic extension to October 15) |
5. Penalties for Non-Compliance
- FBAR penalty: Up to $10,000 per violation (non-willful)
- FATCA failure: $10,000+ for non-reporting
- Late filing: Up to 25% of unpaid tax
Tax Filing Requirements in India for NRIs
In India, NRIs are only taxed on:
- Income earned or received in India
- Income accrued or deemed to accrue in India
1. Income Subject to Tax in India
| Income Type | Taxable in India? |
|---|---|
| Interest on NRE/NRO accounts | NRE – Tax-free; NRO – Taxable |
| Rental income from Indian property | Yes |
| Capital gains on Indian assets | Yes |
| Salary received in India | Yes |
| Global income | No (if NRI status) |
2. Applicable ITR Forms
| ITR Form | Use |
|---|---|
| ITR-2 | For NRIs with income from capital gains, property, or foreign assets |
| ITR-3 | For NRIs with business/professional income in India |
| ITR-1 (Not Allowed) | Not for NRIs (even with basic income sources) |
3. DTAA Benefits in India
India allows relief from double taxation under the India-US DTAA. Methods include:
- Exemption method: Income taxed only in one country
- Credit method: Credit for tax paid in the other country
4. Filing Deadlines in India
| Tax Return | Due Date |
|---|---|
| Regular ITR filing | July 31 (for non-audit cases) |
| With Audit (e.g., business) | October 31 |
| Belated return | December 31 |
Key Differences Between US and Indian Tax Systems for NRIs
| Feature | US | India |
|---|---|---|
| Basis of Taxation | Worldwide Income | Indian Income Only |
| Foreign Asset Reporting | Mandatory (FATCA, FBAR) | Required in ITR (Schedule FA) |
| Standard Deduction | Available | Limited to Indian income |
| Residential Test | Based on days + Green Card | Only on days stayed in India |
| DTAA Relief | Available via Form 1116 | Available under DTAA Clauses |
Common Tax Scenarios for NRIs
✔ Scenario 1: NRI with Rental Income in India
- File ITR-2 in India
- Declare income in Form 1040 in US
- Claim foreign tax credit using Form 1116
✔ Scenario 2: NRI with Capital Gains in India
- Capital gains tax applies in India
- Declare same in US tax return
- Apply DTAA treaty relief
✔ Scenario 3: Interest Income in NRO Account
- NRO interest is taxable in India
- Report in US return as global income
- Foreign tax credit may apply
Tips for Managing NRI Tax Compliance
- Track Residency Carefully: Use a physical presence calculator.
- Use DTAA Wisely: Avoid dual taxation with credit or exemption clauses.
- Maintain Proper Records: Keep documents for income, tax paid, and transfers.
- File FBAR and FATCA: These are mandatory even if no income tax is due.
- Consult Experts: Cross-border filings require coordination between CA (India) and CPA (US).
Tax Planning Strategies for NRIs
| Strategy | Benefit |
|---|---|
| Invest in NRE/FCNR deposits | Tax-free interest in India |
| Avoid repatriating income unnecessarily | Reduce US tax exposure |
| Gift funds to resident family (within limit) | Utilize gift tax exemption |
| Use DTAA for capital gains | Reduce tax liability in US |
Frequently Asked Questions (FAQs)
1. Do NRIs need to file tax returns in both countries?
Yes, if you earn taxable income in both India and the US, you must file returns in both. You can avoid double taxation via DTAA.
2. Is income from Indian mutual funds taxable in the US?
Yes. While India deducts TDS on capital gains and dividends, you must declare these in your US tax return.
3. Can NRIs claim the standard deduction in India?
Only on salary income. No standard deduction is allowed on interest or capital gains.
4. What if I missed filing FBAR or FATCA?
Voluntary disclosure programs may help reduce penalties. Seek professional advice immediately.
Conclusion
Managing taxes as an NRI with financial connections to both India and the US requires diligence, planning, and a clear understanding of both jurisdictions’ rules. Filing timely, reporting global assets, and claiming treaty benefits under DTAA are crucial to avoid penalties and unnecessary tax burdens.
Always consult a cross-border tax professional to ensure compliance and to optimize your global tax position.