US and India tax for Indians living in America

Are you a US taxpayer on your Indian money at all?

US Three tests decide it, and any one of them is enough on its own. You’re a US tax resident if you’re a citizen, if you hold a green card (from the day it’s issued until you formally give it up or a court or a treaty tie-breaker says otherwise), or if you meet the substantial presence test: at least 31 days in the US this year, and 183 days counted across a three-year window — this year in full, a third of last year, and a sixth of the year before that.

Meet any of the three and the rest of this page applies to you: the IRS taxes your income from anywhere, India included, whether or not you ever bring the money to the US. Fall short of all three and you’re a nonresident alien, taxed by the US only on US-source income — Indian income and Indian accounts generally sit outside its reach, though a green card or a long US posting changes that from day one, not from the day you file.

The substantial presence test has two carve-outs worth knowing before you count days by hand. Certain visa categories — a student on an F visa in their first years, for instance — are “exempt individuals” whose days don’t count at all while the exemption lasts. And a “closer connection” exception can keep someone out of US residency for a year where they were present fewer than 183 days, kept a tax home abroad all year, and can show closer ties to that other country. That’s exactly the person whom the three-year weighted total would otherwise push over; it’s no help once you’re present for 183 days or more in the current year itself, and you claim it on a statement with your return. Both carve-outs are narrow, and a CPA should confirm either applies before you rely on it.

The year you cross the line, or leave it, is a dual-status year: part of the year as a nonresident alien, part as a resident, split at your residency start or end date. Your residency start date is the first day you’re present in the US in the year you meet the substantial presence test, or the first day you’re present in the US as a lawful permanent resident under the green card test, whichever comes first if both apply. Only the resident part reports worldwide income, filing rules differ for the two halves, and the ordering can change what deductions you get — the standard deduction generally isn’t available on a dual-status return, which surprises people used to claiming it every other year.

It’s the kind of return worth a CPA’s eyes the first time, and it’s exactly why an H-1B holder’s first US tax year and a green card holder’s last year in India often don’t match either country’s simple assumptions: you can easily be a dual-status alien for US purposes while still counting as ordinarily resident in India for months longer, because the two tests measure completely different things on completely different calendars.

Worldwide income, and India’s separate claim on the same money

Becoming a US tax resident doesn’t change anything on the Indian side. India taxes you by your own residency test — days in India this year and over recent years (2025 Act s. 6was s. 6) — and most readers here stay non-resident or RNOR in India for years after becoming resident in the US, since the two tests count completely different things. Check your Indian residency status if you’re not sure which one you are this year; it decides how much of your Indian income India taxes at all.

India As a non-resident, India still taxes what arises there: rent, interest, dividends and gains on Indian assets, usually with tax deducted before you’re paid. US The US taxes the same income again, in full, because it taxes its residents on income from anywhere. Nothing about India’s NRI status excuses it from the US return; the two systems are simply asking different questions about the same rupee.

That double claim is real, and the treaty is what keeps it from being paid twice over. The next two sections cover how.

It’s worth being specific about what “worldwide income” pulls in, because readers often underestimate it. It isn’t just salary and rent: it’s NRO and NRE interest, dividends on Indian shares, gains on selling Indian mutual funds or property, a pension from a former Indian employer, and income from a business or a rental you still hold in India, all added to whatever you earn in the US and taxed together at your US rates. Nothing about the income being small, or already taxed once in India, takes it off the US return; it changes only how much credit you can claim back, covered next. Our residency pillar has the Indian day tests and RNOR status in full, if you want the India side worked through on its own.

The tie-breaker and the saving clause: what the treaty changes, and what it doesn’t

If you’re genuinely resident in both countries at once under their own rules — rare in practice, since the US tests run on presence and status while India’s run on days — the treaty’s tie-breaker picks one: first your permanent home, then your closer personal and economic ties, then where you habitually live, then nationality. It matters for treaty claims and for which country a mutual agreement procedure runs through; it does not stop either country applying its own domestic rules on income arising there.

That limit is deliberate, written into the treaty as the “saving clause”: each country keeps the right to tax its own residents and citizens as though the treaty didn’t exist, with a short list of exceptions (relief from double taxation among them). In practice this means becoming a US tax resident, or a US citizen, doesn’t let you use the treaty to escape US tax on your worldwide income — the treaty’s job here is to sort out the double taxation afterwards, through the credit below, not to pick a single country upfront the way the residence tie-breaker sounds like it might.

Take the case most readers here actually face: a green card holder who still keeps a home, a family and close financial ties in India for a year or two after moving. Under the treaty’s tests alone, that person might look like a resident of both countries, and the tie-breaker would likely land on India — permanent home and centre of vital interests both point that way early on. The saving clause lets the US tax its residents “as determined under Article 4”, so a green card holder the tie-breaker makes resident in India can be treated as a nonresident alien for US income tax: they file as a nonresident and disclose the treaty position on Form 8833. That has a cost. A long-term green card holder who does it can be treated as having expatriated, with the exit-tax consequences below, so it’s a step to take only with a CPA. A US citizen can’t use the tie-breaker at all.

Relief from double tax: the foreign tax credit

US The main tool is the foreign tax credit, claimed on Form 1116 against Indian income tax you’ve actually paid or had deducted on the same income. It isn’t automatic and it isn’t always complete: the credit is capped at the US tax attributable to your foreign-source income, so if most of your income is US-source, room to use an Indian tax credit can be thin in that year, with unused credit carried back one year and forward ten. Rent and gains that India taxes first, and NRO interest with TDS deducted, are the income most readers here are crediting.

India On the Indian side, the treaty’s credit article gives relief only to a resident of India. As a non-resident, what the treaty gives you in India is lower rates on interest, dividends and some other income, claimed with a tax residency certificate and the treaty form under 2025 Act s. 159was s. 90; the double-tax relief itself happens on your US return. Getting both sides right, in the right order, is specialist work.

The credit is also sorted into separate “baskets” — passive income and general category income are the two readers here meet most — and each basket’s cap is worked out on its own. Indian rent, interest and dividends generally all sit in the passive basket together, while salary sits in the general one, so a bumper year of US salary can leave you with plenty of foreign tax credit sitting unused simply because there wasn’t enough foreign-source income in that basket to absorb it. Keeping Indian TDS certificates and the Indian return itself for at least the ten years a credit can carry forward is the practical habit that prevents a real credit from quietly expiring unused.

Social Security: the agreement that doesn’t cover India

The United States has bilateral Social Security agreements with a number of countries — the UK and Canada among them — that stop the same work being taxed for social security twice and let contribution credits in one country count toward eligibility in the other. India isn’t one of them. There’s no US-India totalization agreement, so an employee can end up paying US Social Security tax and India’s EPF contributions on the same work, with no coordination between the two, and credits earned in one country generally don’t help you qualify for benefits in the other.

This is separate from the income tax treaty covered above, and separate from India’s own EPF and NPS rules — three different questions that happen to sound like one. The point to take away here is that the coordination readers may expect from a UK or Canada move simply isn’t there.

The gap shows up most sharply for employees sent between the two countries: a UK or Canadian assignee would get a certificate keeping them in one system, but an India–US assignee has no such certificate, so both sets of contributions can apply to the same salary. None of this affects the income tax treaty’s credit above; it’s a separate, narrower gap that a CPA experienced with India specifically — not just cross-border tax generally — is the person to plan around.

Report the accounts: FBAR and FATCA

US Holding NRE, NRO or FCNR accounts, or an Indian demat or mutual fund folio, brings its own reporting even when there’s no extra tax. Once your foreign accounts together pass USD 10,000 at any point in the year, you file an FBAR with FinCEN — a separate filing from your tax return, on its own deadline, and one most readers here have never heard of before their first US return. Above a higher threshold that depends on your filing status and where you live, Form 8938 goes with the return itself, and it reaches further than accounts: an Indian mutual fund folio counts even though you also report it separately as a PFIC below.

Neither report is optional once you cross the threshold, and neither depends on the accounts having earned anything that year. Our guide to NRE, NRO and FCNR accounts has the India side — what each account is for and how India taxes the interest.

The full reporting guide covers the FBAR and FATCA reporting together, threshold by threshold, for Indian accounts specifically.

The FBAR counts an account you merely control, not just one in your own name — a joint account with a parent in India, or one you can operate under a power of attorney. Form 8938 doesn’t count signature authority alone. The FBAR’s threshold is tested on the highest combined balance at any time in the year, and Form 8938 looks at both the year-end value and the highest value, so a fixed deposit that matured and was reinvested, or rupees that passed through an account on their way to a property purchase, can push you over a threshold you’d never have crossed looking only at the year-end figure. Missing either filing isn’t cheap: a non-willful FBAR miss can cost up to USD 16,536 per report, and far more if it’s willful, which is the single biggest reason to get this checked early rather than after the fact.

Indian mutual funds: the PFIC problem

US To the IRS, an ordinary Indian equity, debt or hybrid mutual fund is a passive foreign investment company — a category built to stop Americans deferring tax through offshore funds, and it applies whether or not you knew the label existed when you bought the units. With no election, the gain on selling is spread over your whole holding period and each earlier year’s share is taxed at that year’s top rate, 37% currently, plus IRS interest running from each year’s due date. A mark-to-market election, made early, taxes each year’s rise at your own rate instead, with no interest, but it has to be chosen while it still helps.

India India taxes the same sale too, as a non-resident’s capital gain, with the fund house deducting tax before paying you (2025 Act s. 393(2) Table Sl. 17was s. 195). That Indian tax is a separate bill from the US one, and only part of it may be creditable against the US tax through the credit above. The full mechanics — the three US methods, which one an Indian fund can actually use, and a worked example end to end — are in the PFIC guide.

The mistake this catches most often is treating a systematic investment plan as one purchase: every SIP instalment is its own lot, with its own date and its own share of the gain, so ten years of monthly SIPs into one fund can mean well over a hundred lots to track by the time you sell. That record-keeping burden, more than the tax itself, is why many advisers tell clients moving to the US to simply stop new SIP purchases into Indian funds once they’re a US person, and either hold what they have or switch to a demat account of Indian shares, which don’t carry the PFIC label at all.

Property in India: rent and sale on your US return

US Rent from an Indian flat and any gain on selling it are both reported on your US return the ordinary way — as foreign rental income and a capital gain — alongside whatever India takes at source. There’s no PFIC-style penalty here; the complexity is entirely in lining up the two countries’ numbers: different cost basis and depreciation rules, a purchase price that has to be converted to dollars at the exchange rate on the day you bought, and Indian tax that may or may not be fully creditable depending on how much other foreign income you have that year.

India On the Indian side, a tenant or a buyer deducts tax before you’re paid, at the non-resident rate, and the way to get back an over-deduction is the same Indian return covered in the property section. A green card holder who already owns property in India before moving faces a slightly different question — what changes on the day the card is issued, and what doesn’t.

Depreciation is the detail that trips people up most, because the two countries don’t treat it the same way. The US requires you to depreciate a rented property over its US-prescribed life and recapture that depreciation on sale, whether or not you ever claimed it on an Indian return, so skipping the deduction for years doesn’t avoid the eventual recapture — it just means you paid more US tax along the way for nothing. And on a sale, cost has to be established in dollars at the exchange rate on the day you bought, decades ago in many cases, which is exactly the kind of record worth pulling together well before a sale is even on the table.

Gifts, inheritance and moving back

US A gift or an inheritance from India isn’t taxable income in the US — the giver isn’t a US taxpayer, and the US doesn’t tax recipients on gifts at all. What changes above USD 100,000 from a nonresident individual or a foreign estate in a year, counting related givers together, is that you have to report it, on Form 3520, filed by your return’s own due date. Missing the threshold isn’t a tax bill by itself, but it is a penalty, and it keeps your return open to the IRS for that year until it’s filed.

The threshold counts gifts from related givers together, so several smaller gifts from a parent, a sibling and a grandparent in the same year — none of them large on its own — can add up to more than a single large gift would, once the givers are related to one another. Money moved through the Liberalised Remittance Scheme from India’s side doesn’t change any of this on the US side: what matters here is who gave it and how much, not which Indian regulation let it leave the country. Sending money the other way, to family in India, is a different question: paying in cash can bring the US remittance tax.

Moving back to India doesn’t touch a 401(k) or an IRA directly: both stay US accounts. Under the treaty’s pension article, periodic pension payments to someone resident in India who isn’t a US citizen are taxable only in India; lump sums and early withdrawals don’t get that protection, and a US citizen stays taxable by the US on all of it. India may let you defer tax on a notified foreign retirement account until withdrawal (section 158, old section 89A). A lump sum and a series of periodic withdrawals aren’t treated the same way by either country, which is worth planning with both a CPA and a CA before you take the first withdrawal, not after.

Citizenship, not residence, is what keeps the US estate tax in the picture long after you’ve moved: a US citizen’s worldwide estate, Indian assets included, stays exposed to US estate tax wherever they live or die, at a far higher exemption than most estates ever reach but with none of the automatic relief a spouse who isn’t a US citizen would otherwise get. A long-term green card holder (one who held it in at least 8 of the last 15 years) who gives it up can trigger the separate exit tax regime if their net worth or past tax bills cross its thresholds, or if they can’t certify five years of US tax compliance, which is a planning conversation worth having years before the move, not during it. The guide to moving back to India covers the Indian side of returning in full; its US-side companion on Social Security after moving to India covers 401(k) and IRA withdrawals.