The email from my CPA made my heart stop.
“Mani, did you report your Indian mutual fund gains? The IRS classifies these as PFICs. You might owe penalties.”
This was 2015. I had been filing US taxes for eight years. I thought I knew what I was doing. Turns out I had been making mistakes the whole time.
That year cost me $3,200 in back taxes and professional fees. All because I did not know the right way to report Indian income on my US return.
I do not want you to make the same mistakes.
If you are a US citizen, Green Card holder, or US tax resident with income from India, this guide is for you. I will walk you through exactly how to report each type of Indian income to the IRS. No jargon. Just practical steps.
Already familiar with the basics? You might want to read our US NRI tax filing guide first. And if you want to understand how to avoid double taxation, check out our DTAA guide for US NRIs.
Why the IRS Cares About Your Indian Income
Here is the thing about America. The IRS wants to know about your worldwide income. Every rupee you earn. Everywhere in the world.
Most countries tax based on where you live. The US taxes based on who you are. US citizen? File US taxes. Green Card holder? File US taxes. Does not matter if you live in Bangalore or Boston.
This catches many NRIs off guard. They assume Indian income stays in India. It does not. At least not for tax reporting purposes.
The good news? You will not pay double taxes. The DTAA between India and USA prevents that. But you still must report everything correctly.
Types of Indian Income You Must Report
Let me list out every type of Indian income that needs to go on your US return.
| Income Type | IRS Form Required | Where to Report |
|---|---|---|
| Rental income from Indian property | Form 1040, Schedule E | Part I of Schedule E |
| Interest from NRO account | Form 1040, Schedule B | Part I Line 1 |
| Interest from NRE account | Form 1040, Schedule B | Part I Line 1 |
| Dividends from Indian stocks | Form 1040, Schedule B | Part II Line 5 |
| Capital gains from Indian stocks | Form 1040, Schedule D | Short term or long term |
| Capital gains from Indian property | Form 1040, Schedule D | Long term capital gains |
| Indian mutual fund gains | Form 8621 (PFIC) | Extremely complicated |
| Salary earned in India | Form 1040 | Line 1 wages |
| Indian pension income | Form 1040 | Line 5a and 5b |
| Interest from Indian FDs | Form 1040, Schedule B | Part I Line 1 |
Yes. That NRE account interest that is tax free in India? Still reportable to the IRS. India exempts it. America does not.
Let me break down each type.
Reporting Indian Rental Income
This is probably the most common situation. You own a flat in India. It generates rent. How do you report it?
Step 1: Convert to US dollars
The IRS wants everything in dollars. Use the average exchange rate for the year. The IRS publishes yearly average rates. For 2024, the average was approximately 83 rupees per dollar.
Step 2: Calculate your net rental income
Gross rent minus allowable expenses. Allowable expenses include property tax, maintenance charges, repairs, insurance, and depreciation.
Step 3: Report on Schedule E
Fill out Part I of Schedule E. List the property address. Report income and expenses. The net amount flows to your Form 1040.
Step 4: Claim Foreign Tax Credit
India deducted TDS on your rent. Usually 30% for NRIs. You can claim credit for this on Form 1116.
Here is an example:
Your flat in Mumbai earns Rs 50,000 monthly rent. Annual rent is Rs 6,00,000. At 83 INR/USD, that is about $7,229.
India deducted TDS of Rs 1,80,000 (30%). That is about $2,169.
You report $7,229 gross rent on Schedule E. Deduct your expenses. The net is taxable income. Then you claim $2,169 as Foreign Tax Credit on Form 1116.
For more on managing Indian property from abroad, see our guide on NRI property ownership.
Reporting Interest from Indian Bank Accounts
This trips up a lot of people.
NRE Account Interest
Tax free in India. Not tax free in the US. Report every rupee of interest earned.
I know. It feels unfair. You chose NRE specifically because it is tax free. But India’s tax exemption does not bind the IRS. If you are US tax resident, that interest is taxable income.
Report on Schedule B, Part I. Convert to dollars using the exchange rate on the date interest was credited. Or use yearly average rate for simplicity.
NRO Account Interest
India already deducted 30% TDS. Report the gross interest (before TDS) on Schedule B. Then claim Foreign Tax Credit for the TDS on Form 1116.
Fixed Deposit Interest
Same treatment. Report gross interest. Claim credit for TDS paid.
If you are still confused about account types, our NRE vs NRO comparison explains the differences.
Reporting Indian Dividends
Indian companies now pay dividends after deducting applicable taxes. When you receive dividends from Indian stocks, report them on Schedule B, Part II.
| Dividend Source | TDS Rate in India | US Reporting |
|---|---|---|
| Listed company dividends | 20% for NRIs | Schedule B, Form 1116 for credit |
| Mutual fund dividends | 20% for NRIs | Form 8621 (PFIC rules apply) |
| Unlisted company dividends | 20% for NRIs | Schedule B, Form 1116 for credit |
Here is the problem. Indian dividends are taxed at source at 20%. US qualified dividend rate can be as low as 0% to 20% depending on your bracket. You might end up with excess Foreign Tax Credits you cannot use in the current year.
The good news? Excess credits can be carried back one year or forward ten years.
Reporting Capital Gains from Indian Assets
Indian Stocks (Direct Holdings)
When you sell Indian stocks, report the gain on Schedule D and Form 8949.
Calculate gain in rupees first. Then convert to dollars. Use the exchange rate on the date of purchase for cost basis. Use exchange rate on date of sale for proceeds.
India taxes short term gains (held less than 12 months) at 15%. Long term gains (held more than 12 months) at 10% above Rs 1 lakh.
US taxes short term gains at ordinary income rates. Long term gains at 0%, 15%, or 20% based on income.
You can claim Foreign Tax Credit for Indian capital gains tax paid.
Indian Property
Selling property in India? This gets complicated.
India taxes long term capital gains on property at 20% with indexation benefit. The US taxes at your applicable long term rate.
Report the sale on Schedule D. Convert all amounts to dollars. Claim Foreign Tax Credit for Indian taxes paid.
One catch. India allows indexation to adjust cost basis for inflation. The US does not. Your gain calculation will be different for each country. Report the US calculated gain to the IRS. Claim credit for actual Indian taxes paid.
For detailed property sale guidance, see our article on NRI property transactions.
The PFIC Problem: Indian Mutual Funds
This is where things get ugly.
Indian mutual funds are classified as Passive Foreign Investment Companies (PFICs) by the IRS. The tax treatment is punitive. Deliberately punitive. The US government wants to discourage Americans from investing in foreign funds.
Here is what PFIC treatment means:
- You must file Form 8621 for each mutual fund you own
- Gains are taxed at highest ordinary income rate (currently 37%)
- Interest charges apply as if you should have paid taxes each year
- The paperwork is a nightmare
| Investment Type | IRS Classification | Tax Treatment |
|---|---|---|
| Indian stocks (direct) | Regular securities | Normal capital gains rates |
| Indian ETFs | Usually PFIC | Form 8621 required |
| Indian mutual funds | PFIC | Form 8621 required |
| US mutual funds investing in India | Regular mutual fund | Normal treatment |
My recommendation? If you are US tax resident, avoid Indian mutual funds entirely. The compliance burden is not worth it. Invest in US listed India focused ETFs instead if you want India exposure.
If you already own Indian mutual funds, consult a CPA who specializes in expat taxation. This is not DIY territory.
For investment alternatives, see our investment options for NRIs.
Reporting Indian Pension Income
If you receive pension from a former Indian employer:
Government Pension
Under DTAA Article 19, Indian government pension is generally taxable only in India. However, you still report it on your US return for informational purposes. Then claim the treaty exemption.
Private Pension
Report on Form 1040, Lines 5a and 5b. If India taxed it, claim Foreign Tax Credit.
EPF/PPF Withdrawals
This is murky territory. The IRS has not provided clear guidance on how to treat EPF and PPF.
Conservative approach: Report as ordinary income. Claim Foreign Tax Credit for any Indian taxes paid.
Some CPAs argue these should be treated like IRAs with tax deferral. But this is aggressive and not universally accepted.
When in doubt, consult a professional.
Form 1116: Claiming Foreign Tax Credit
Form 1116 is your best friend. This is how you avoid double taxation on Indian income.
Step by step:
- Complete a separate Form 1116 for each income category (passive, general, etc.)
- Report foreign income in US dollars
- Report foreign taxes paid in US dollars
- Calculate the credit limit
- Carry forward any excess credits
| Income Category | What It Includes | Form 1116 Box |
|---|---|---|
| Passive income | Interest, dividends, rental, capital gains | Check box “d” |
| General category | Salary, business income | Check box “e” |
| Section 901(j) | Income from certain countries | Check box “g” |
Most Indian income falls under passive category. Rental income, bank interest, dividends, capital gains. All passive.
The credit is limited to the US tax attributable to that foreign income. You cannot use Foreign Tax Credit to offset tax on US source income.
Example: Your US tax on $10,000 Indian rental income is $2,200. You paid $2,500 TDS in India. You can only claim $2,200 credit. The excess $300 carries forward.
FBAR: The Report Everyone Forgets
This is not about paying taxes. This is about reporting foreign accounts.
If your foreign accounts (all of them combined) exceeded $10,000 at any point during the year, you must file FBAR. That is FinCEN Form 114.
| Requirement | FBAR (FinCEN 114) | FATCA (Form 8938) |
|---|---|---|
| Threshold (US residents) | $10,000 any time | $50,000 end of year or $75,000 any time |
| Threshold (expats) | $10,000 any time | $200,000 end of year or $300,000 any time |
| Deadline | April 15, auto extension to October 15 | With tax return |
| Penalty for non filing | Up to $10,000 per violation (non willful) | Up to $10,000 per form |
Your NRE account counts. Your NRO account counts. Your Indian brokerage account counts. PPF counts. Everything counts.
I cannot stress this enough. FBAR penalties are severe. Up to $10,000 per account per year for non willful violations. Willful violations can result in criminal charges.
File FBAR electronically through the BSA E-Filing System. It is separate from your tax return.
Our detailed FBAR guide walks through the requirements.
Form 8938: FATCA Reporting
If your foreign assets exceed certain thresholds, you also file Form 8938 with your tax return. Yes, this is in addition to FBAR. Yes, there is overlap. No, it does not make sense. But you file both.
Form 8938 has higher thresholds than FBAR. Most people who file 8938 also file FBAR. But some file only FBAR.
Report all Indian bank accounts, brokerage accounts, mutual funds, fixed deposits, and financial assets. Do not report physical assets like property or gold. Only financial accounts and assets.
Common Mistakes to Avoid
After seven years of community calls, I have seen every mistake possible.
Mistake 1: Not reporting NRE interest
Just because India does not tax it does not mean the US does not tax it. Report it.
Mistake 2: Using wrong exchange rates
Be consistent. Use IRS yearly average rates or spot rates on transaction dates. Document your method.
Mistake 3: Forgetting FBAR
Even if you owe no taxes on foreign income, you still file FBAR if you meet the threshold.
Mistake 4: Not claiming Foreign Tax Credit
You paid Indian taxes. Claim credit. Do not leave money on the table.
Mistake 5: Ignoring PFIC rules for mutual funds
This is the most expensive mistake. PFIC penalties can exceed the value of your investment over time.
Mistake 6: Converting amounts incorrectly
Cost basis should use exchange rate at purchase date. Proceeds should use rate at sale date. Mixing these up changes your gain calculation.
Mistake 7: Missing Schedule B checkbox
Schedule B asks if you have foreign accounts. Check yes. Even if your accounts are below FBAR threshold, answer the question honestly.
When to Get Professional Help
Some situations are DIY friendly. Others are not.
You can probably handle it yourself if:
You only have NRO/NRE interest income You have simple rental income with standard TDS You do not own Indian mutual funds Your total Indian income is under $50,000
Get professional help if:
You own Indian mutual funds (PFIC nightmare) You sold Indian property during the year You have Indian retirement account withdrawals You received inheritance from India You have Indian business income You are returning to India permanently
A CPA specializing in expat taxation costs $500 to $2,500 depending on complexity. Compare that to IRS penalties and interest if you get it wrong.
Our financial advisors directory includes professionals who understand cross border taxation.
Documentation You Need
Keep these documents for at least seven years:
From India:
- Form 16A (TDS certificates)
- Bank interest certificates
- Brokerage statements
- Property sale documents
- Rental agreements
- Municipal tax receipts
For US filing:
- Exchange rate documentation
- Form 1116 worksheets
- Foreign Tax Credit carryforward records
- FBAR filing confirmations
- Prior year tax returns
I keep a dedicated folder in Google Drive. Every document scanned and organized by year. When my CPA asks for something, I find it in seconds.
Tax Calendar for US NRIs with Indian Income
| Deadline | What is Due | Extension Available |
|---|---|---|
| January 31 | Indian Form 16A issued | No |
| April 15 | US tax return (or extension) | Yes, to October 15 |
| April 15 | FBAR due | Auto extension to October 15 |
| June 15 | Auto extension for expats living abroad | Already extended |
| July 31 | Indian ITR due | Yes, varies by year |
| October 15 | Final extended US return deadline | No |
If you are living outside the US on April 15, you get automatic extension to June 15. But if you owe taxes, interest accrues from April 15. File by April 15 if you owe money.
Frequently Asked Questions
Q: Do I need to report Indian income if it is below the standard deduction?
Yes. Reporting requirement is separate from tax liability. Report all income. You may owe nothing after standard deduction. But you still report.
Q: Can I exclude Indian income using Foreign Earned Income Exclusion?
FEIE only applies to earned income (salary, self employment). It does not apply to passive income like rent, interest, or dividends. Also, FEIE requires you to meet either bona fide residence or physical presence test. Most US based NRIs do not qualify.
Q: What if I forgot to report Indian income in previous years?
You have options. Streamlined filing procedures exist for non willful violations. You can file amended returns. Consult a tax professional before doing anything. Voluntary disclosure is better than IRS discovery.
Q: Should I keep my Indian investments or sell them?
Depends on your situation. Indian mutual funds are problematic (PFIC). Direct stock holdings are manageable. Real estate depends on your plans. Consider tax efficiency when deciding.
Q: My Indian income is small. Does it really matter?
Yes. The IRS does not have a minimum threshold for reporting foreign income. And FBAR has its own $10,000 threshold that triggers regardless of income amount.
Q: Can I use tax software to file with Indian income?
Basic software like TurboTax handles simple cases. Schedule E rental income works fine. But complex situations like PFIC or property sales often exceed software capabilities. At minimum, use the paid version that supports Foreign Tax Credit.
Quick Checklist
Before you file, make sure you have:
- Converted all Indian income to US dollars
- Reported all bank account interest (including NRE)
- Included Form 1116 for Foreign Tax Credit
- Filed FBAR if accounts exceeded $10,000
- Filed Form 8938 if you meet the threshold
- Reported any Indian mutual funds on Form 8621
- Kept copies of all TDS certificates
- Answered Schedule B foreign account question
- Documented exchange rates used
The Bottom Line
Reporting Indian income on US returns is not optional. It is not complicated if you know the rules. But the consequences of getting it wrong are real.
I learned that the hard way in 2015. You do not have to.
Here is what matters:
- Report all Indian income to the IRS
- Convert everything to US dollars
- Claim Foreign Tax Credit for Indian taxes paid
- File FBAR every year if threshold met
- Avoid Indian mutual funds if possible
- Keep detailed records
- Get professional help for complex situations
The cross border tax world is confusing. But you are not alone.
If you are planning your move back to India or just trying to manage finances across both countries, join our WhatsApp community at https://backtoindia.com/groups. Over 20,000 NRIs helping each other with real, lived experience. It is free and volunteer run.
Every week, someone in the group asks a tax question I had not thought of. And someone else answers from experience. That is the power of community.
Disclaimer: This article is for informational purposes only. Tax laws are complex and change frequently. The author is not a tax professional. Always consult qualified tax professionals for advice specific to your situation.
Sources:
- IRS Publication 54 (Tax Guide for US Citizens Abroad): https://www.irs.gov/publications/p54
- IRS Publication 514 (Foreign Tax Credit): https://www.irs.gov/publications/p514
- IRS Form 1116 Instructions: https://www.irs.gov/instructions/i1116
- IRS Form 8938 Instructions: https://www.irs.gov/instructions/i8938
- FBAR Filing Requirements: https://www.fincen.gov/report-foreign-bank-and-financial-accounts
- IRS PFIC Guidance: https://www.irs.gov/forms-pubs/about-form-8621
- IRS Yearly Average Exchange Rates: https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates
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