The US-Indian Treaty provides little benefit
While there is a US-Indian tax treaty that claims to offer benefits, the issue is that the "Savings Clause" of the treaty negates the double-taxation prohibition. Meaning, anything earned in India is subject to US taxation. However, the foreign income exclusion applies if you are domiciled in India, and you may be entitled to a foreign tax credit for any taxes paid in India.
The NRE/NRO trap
Indians not living in India can only have NRE/NRO accounts. The benefit is that these accounts are tax-free in India. If an Indian is also a US person, a NRE/NRO is taxable. This trap has caused many Indians to fail to disclose their worldwide income and many have had to enter into some sort of offshore disclosure program.
Are you a US person living in India?
In India, resident taxpayers are taxed on their worldwide income. However, non-resident taxpayers are taxed only on income received in India or on income arising in India.
The US taxes its persons on a worldwide basis. So what you earn in India, even if it is taxed by the Indian taxing authority, is subject to additional taxes by the IRS. This is true even if you have a "tax-free" account in India. However, you are entitled to a credit for taxes paid. In the alternative, there is a foreign income exclusion which will exempt a portion of your income from income taxes.
Are you an Indian person living in the United States? (Visa/Substantial Presence Test)
If you are a Green Card holder you are subject to universal taxing jurisdiction on all your income, anywhere in the world. If you are a visa holder the rules are a bit more complicated about when universal taxing jurisdiction is triggered.
FBAR Information
The FBAR is a reporting form for those who hold $10,000 or more (in the aggregate) in a foreign financial account. You must also include things like life insurance policies, mutual funds, accounts you only have signatory authority on, and more. Learn more about FBARs here.
FATCA Reporting – Form 8938
Certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 need to report information about those assets on IRS Form 8938, which must be attached to the taxpayer’s annual income tax return. Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad.
Learn about Form 8938 filing deadlines here, and reporting thresholds here.
More on the Foreign Earned Income Exclusion
Citizens and residents living and working outside the U.S. may be entitled to a foreign earned income exclusion that reduces taxable income. In addition, you may exclude housing expenses, but with limits. There are limits and special rules about who qualifies for the exclusion, and we can help you understand if you qualify.
More on Foreign Tax Credits
This is a non-refundable tax credit for income taxes paid to a foreign government as a result of foreign income tax withholdings. The foreign tax credit is available to anyone who either worked in a foreign country or has investment income from a foreign source. There are qualifying factors, and we can help you understand if you are eligible to tax advantage of this credit.
Many items need technical computations
Based on our experience, we find that there are many complicated aspects of treatment of different types of accounts in India. For instance:
- Fixed deposits with a term over one year must be given OID treatment; interest is taxes when accrued, not earned.
- Indian life insurance is typically non-qualified and must receive 7702G computations.
- HSBC India is on the foreign facilitators list.
- Indian Mutual Funds require PFIC computations/Form 8621.
- We treat EPFs as employee trusts. This means they need special treatment under IRC 402(b) and distributions are effectively taxed under code section 72.
- PPFs are taxed yearly on the interest amounts.
- Knowing the difference between NRE and NRO accounts is of the utmost importance.
- If you have a pension fund from a former employer, this needs special treatment.
- Indian DEMAT Accounts involved complicated accounting, along with FBAR reporting.
If you need assistance with any personal or business tax issues related to India, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.
