NRI Tax Filing Requirements in the US and India

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:

ConditionCriteria
Stay DurationLess than 182 days in India in a financial year
Combined StayLess 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.
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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

FormPurpose
Form 1040Annual individual tax return
FBAR (FinCEN 114)For foreign bank accounts exceeding $10,000
FATCA (Form 8938)For foreign financial assets over threshold limits
Form 1116Claim foreign tax credit
Form 2555Exclude 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 CategoryDeadline
Individual Return (Form 1040)April 15 (or October 15 with extension)
FBARApril 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 TypeTaxable in India?
Interest on NRE/NRO accountsNRE – Tax-free; NRO – Taxable
Rental income from Indian propertyYes
Capital gains on Indian assetsYes
Salary received in IndiaYes
Global incomeNo (if NRI status)

2. Applicable ITR Forms

ITR FormUse
ITR-2For NRIs with income from capital gains, property, or foreign assets
ITR-3For 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 ReturnDue Date
Regular ITR filingJuly 31 (for non-audit cases)
With Audit (e.g., business)October 31
Belated returnDecember 31

Key Differences Between US and Indian Tax Systems for NRIs

FeatureUSIndia
Basis of TaxationWorldwide IncomeIndian Income Only
Foreign Asset ReportingMandatory (FATCA, FBAR)Required in ITR (Schedule FA)
Standard DeductionAvailableLimited to Indian income
Residential TestBased on days + Green CardOnly on days stayed in India
DTAA ReliefAvailable via Form 1116Available 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

  1. Track Residency Carefully: Use a physical presence calculator.
  2. Use DTAA Wisely: Avoid dual taxation with credit or exemption clauses.
  3. Maintain Proper Records: Keep documents for income, tax paid, and transfers.
  4. File FBAR and FATCA: These are mandatory even if no income tax is due.
  5. Consult Experts: Cross-border filings require coordination between CA (India) and CPA (US).

Tax Planning Strategies for NRIs

StrategyBenefit
Invest in NRE/FCNR depositsTax-free interest in India
Avoid repatriating income unnecessarilyReduce US tax exposure
Gift funds to resident family (within limit)Utilize gift tax exemption
Use DTAA for capital gainsReduce 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.

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