US Tax for NRIs and US Persons in India
For any Non-Resident Indian (NRI), Indian resident, or Overseas Citizen of India (OCI) who is a US Person — a US citizen, Green Card holder, or someone who meets the Substantial Presence Test — American tax obligations do not pause when you live in India. The United States is one of only two countries in the world that taxes its citizens and permanent residents on their worldwide income regardless of where they reside. This means your Indian salary, rental income, Fixed Deposits, mutual funds, capital gains, and inherited assets can all be subject to US tax — even while you are living and paying taxes in India.
The compliance picture for US persons in India involves filing a Form 1040 US individual tax return, reporting all Indian financial accounts via FBAR (FinCEN Form 114) if balances exceed $10,000 at any point, disclosing Indian assets via FATCA Form 8938, classifying Indian mutual fund investments as PFICs and filing Form 8621, and potentially filing Forms 3520, 5471, or 8865 for trusts, companies, and partnerships. Non-compliance attracts penalties starting at $10,000 per form per year.
At N D Savla & Associates, our team provides expert US tax advisory for NRIs, returning residents, Green Card holders, and US citizens based in Mumbai and across India.
US Tax for NRIs — Quick Reference Guide
| Parameter | Key Details |
|---|
| Who Must File | US Citizens, Green Card holders, and anyone meeting the Substantial Presence Test (SPT) |
| Tax Basis | Worldwide income — US taxes global income regardless of where you live |
| Primary Return | Form 1040 — due April 15 (auto June 15 for expats; Oct 15 with extension) |
| Foreign Earned Income Exclusion | ~$126,500 (2024) of earned income; does not apply to passive income |
| India-US DTAA | Available to prevent double taxation — use Foreign Tax Credit (Form 1116) or DTAA relief |
| FBAR Threshold | Report if ANY foreign account exceeds $10,000 at any point during the year |
| FATCA / Form 8938 | Threshold: $50K (US) / $200K (abroad) for single filers; double for joint |
| PFIC Risk | Indian mutual funds are almost universally classified as PFICs — Form 8621 required |
| Gift Tax Annual Exclusion | ~$18,000–$19,000 per recipient (indexed annually); Form 709 for excess gifts |
| Estate Tax Lifetime Exemption | ~$13–14 million (TCJA; subject to legislative changes) |
| Penalties for Non-Compliance | $10,000–$100,000+ per violation; criminal prosecution for willful violations |
Who Is a "US Person" for Tax Purposes?
- US Citizens: Every US citizen — whether born in the US, naturalised, or born abroad to a US citizen parent — is a US Person for tax purposes for life, regardless of where they live.
- Green Card Holders (Lawful Permanent Residents): Any individual who holds a US Green Card — even if they currently live in India and rarely visit the US — is a US Person for tax purposes. To exit this status, the Green Card must be formally relinquished using Form I-407.
- Individuals Meeting the Substantial Presence Test (SPT): An individual who is not a citizen or Green Card holder but spends significant time in the US during a calendar year may be considered a US Person for that year. SPT is met if: (1) present in the US for at least 31 days in the current year AND (2) weighted day count for the last 3 years equals or exceeds 183 days (current year × 1, previous year × 1/3, year before × 1/6).
Note: Many Indian professionals on H-1B or L-1 visas who travel frequently to the US may inadvertently meet the SPT without realising it. Once SPT is met, US tax on Indian income for that entire year applies. N D Savla & Associates performs SPT calculations for Indian clients with US travel history.
What Is PFIC? Are Indian Mutual Funds Taxable in the US?
The Passive Foreign Investment Company (PFIC) classification is the single most expensive and surprising US tax trap for NRIs with Indian investment portfolios. Almost every Indian mutual fund — equity, debt, hybrid, index, or ELSS — qualifies as a PFIC. Without the right elections, the tax hit on selling an Indian mutual fund can be catastrophic.
| PFIC Method | Tax Rate | Complexity | When to Use / Avoid |
|---|
| Mark-to-Market (MTM) | Ordinary income rates on annual unrealized gains | Medium | Use for funds with steady growth; no phantom income if fund declines |
| Qualified Electing Fund (QEF) | Capital gains / ordinary on fund's allocated earnings | High | Best if fund provides Annual Information Statement (rare for Indian AMCs) |
| Excess Distribution (Default) | Most punitive — interest charges + top ordinary rate on deferred gains | Low | AVOID — default if no election made; worst outcome on sale or distribution |
Critical planning tip: Sell all Indian mutual funds before becoming a US Person (before Green Card activation or before meeting SPT). This is the most effective PFIC avoidance strategy. The Mark-to-Market election must be made in the FIRST year you are a US Person holding the fund — it cannot be made retroactively.
FBAR vs FATCA Form 8938 — Key Differences
| Parameter | FBAR (FinCEN 114) | Form 8938 (FATCA) |
|---|
| Filed With | FinCEN — not IRS | IRS — attached to Form 1040 |
| Threshold (US resident) | > $10,000 aggregate at any point | > $50,000 year-end / $75,000 any time ($100K/$150K joint) |
| Threshold (Outside US) | Same: > $10,000 | > $200,000 year-end / $300,000 any time ($400K/$600K joint) |
| Assets Covered | Foreign financial accounts (bank, brokerage, pension) | Broader — stocks, interests, annuities, insurance, contracts |
| Penalty (Non-Willful) | $10,000 per violation per year | $10,000 + $10,000 per 30 days after notice (max $50,000) |
| Penalty (Willful) | Greater of $100,000 or 50% of account balance | Same + potential criminal charges |
| Deadline | April 15 (auto extension to Oct 15) | Same as Form 1040 deadline |
Complete US Reporting Requirements for Indian Assets
| Form | Filed With | Reports | Threshold | Penalty (Non-Willful) |
|---|
| FBAR (FinCEN 114) | FinCEN (BSA Portal) | All foreign financial accounts | > $10,000 any time | $10,000/violation |
| Form 8938 (FATCA) | IRS with Form 1040 | Specified foreign financial assets | $50K (US) / $200K (abroad) | $10,000 + $10K/30 days |
| Form 8621 (PFIC) | IRS with Form 1040 | PFIC income and distributions | Any PFIC holding | Statute extended 3 yrs |
| Form 3520 | IRS (separate) | Gifts > $100K from non-US persons / foreign trusts | > $100,000 gift | 35% of gift amount |
| Form 5471 | IRS with Form 1040 | Interests in foreign corporations | Ownership thresholds | $10,000 per form |
| Form 8865 | IRS with Form 1040 | Interests in foreign partnerships | 10%+ interest | $10,000 per form |
| Form 709 | IRS (separate) | US Gift Tax Return | Gifts > annual exclusion | Penalty on tax due |
| Form 706 | IRS (separate) | US Estate Tax Return | Estate > lifetime exemption | Penalty on tax due |
? These are information returns — not tax returns. Many carry penalties even if no tax is owed. Failure to file Form 3520 for a gift from parents > $100,000 attracts a 35% penalty on the gift amount, even if the gift is not taxable in India.
How the India-US DTAA Reduces Double Taxation
The India-United States DTAA prevents the same income from being taxed twice. Without it, a US person in India could face combined effective tax rates exceeding 60% on Indian income. The DTAA provides relief through:
- Foreign Tax Credit (Form 1116): Indian income tax already paid can be credited against the US tax liability on the same income. For most Indian income sources — salary, business, rent — the Indian tax rate exceeds the US rate, resulting in zero net US tax liability after the credit.
- DTAA Treaty Exemptions: Specific income types — pensions, certain government service income, and student stipends — may be taxed only in one country under the India-US DTAA.
- Tie-Breaker Rules: If you are considered a tax resident of both India and the US, the treaty's tie-breaker provisions determine which country has primary taxing rights based on permanent home, centre of vital interests, and habitual abode.
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Frequently Asked Questions
Do NRIs with Indian income need to file US taxes?
Only if they are US Persons — US citizens, Green Card holders, or individuals meeting the Substantial Presence Test. If so, they must file Form 1040 on worldwide income including all Indian income, regardless of where they live. The India-US DTAA and Foreign Tax Credit often eliminate any net US tax liability on Indian income.
What is the FBAR filing threshold for Indian bank accounts?
FBAR must be filed if the aggregate maximum value of all foreign financial accounts exceeded $10,000 at any single point during the calendar year. This includes all Indian bank accounts — NRO, NRE, FDs — and brokerage accounts combined. NRE accounts are not exempt from FBAR reporting.
Are Indian mutual funds considered PFICs?
Yes. Almost all Indian mutual funds qualify as PFICs under US tax law. Without a Mark-to-Market election, the default Excess Distribution Method applies punitive interest charges. The best strategy is to sell Indian mutual funds before becoming a US Person, or elect MTM in the first year of holding.
What happens if I do not file FBAR on time?
Non-willful FBAR violations attract $10,000 per account per year. The IRS Streamlined Foreign Offshore Procedures allow non-willful violators to come into compliance by filing 6 years of FBARs, 3 years of Form 1040, and paying a 5% miscellaneous penalty. Willful violations attract much higher penalties and potential criminal prosecution.
How does the India-US DTAA reduce double taxation?
Through the Foreign Tax Credit (Form 1116) — Indian taxes paid can be credited against US tax liability on the same income. Since Indian tax rates often equal or exceed US rates on business and salary income, this typically reduces net US tax to zero on Indian-source income. Specific income types may also be exempt under DTAA treaty provisions.