A member in our Texas WhatsApp group messaged me last April in a panic.
“Mani, I just got a letter from the IRS. They’re asking about my NRO account interest. I didn’t even know I had to report that.”
He’d been earning about Rs 45,000 a year in NRO interest. That’s roughly $540. He didn’t think it mattered.
Except it did. To the IRS, it absolutely did.
Here’s the thing most NRIs in the US don’t fully grasp: the IRS taxes you on your worldwide income. Every rupee you earn in India – whether it’s NRO interest, rental income, mutual fund gains, or property sale proceeds – must be reported on your US tax return.
Not reporting it isn’t just a mistake. It can trigger penalties, audits, and in serious cases, criminal prosecution.
I’m not a tax professional. But after eight years of running BacktoIndia.com and hearing from thousands of US-based NRIs, I’ve seen what goes wrong – and how to avoid it. This guide breaks down what you need to report, which forms to use, and the costly mistakes to watch out for.
First: Are You a “US Person” for Tax Purposes?
This determines everything.
You’re considered a US person (and must report worldwide income) if you are:
- A US citizen (regardless of where you live)
- A green card holder (regardless of where you live)
- A tax resident under the Substantial Presence Test
The Substantial Presence Test: If you were physically present in the US for at least 31 days in the current year AND 183 days during the 3-year period (current year days + 1/3 of prior year days + 1/6 of the year before that), you’re a US tax resident.
Most NRIs on H1B, L1, or other work visas meet this test after their first year.
If you’re on an F1 or J1 visa, you’re typically exempt from the Substantial Presence Test for the first 5 years (F1) or 2 years (J1).
Key point: If you’re a US tax resident, your Indian rental income, bank interest, capital gains, dividends – all of it goes on your Form 1040. Not Form 1040-NR.
Understanding your US-India double taxation obligations is the first step to getting this right.
Types of Indian Income You Must Report
Let’s go through each one.
1. NRO Account Interest
This is the most common one. Almost every NRI has an NRO account in India earning some interest.
Where to report: Schedule B (Form 1040) – Interest and Ordinary Dividends.
How: Convert the INR interest to USD using the IRS yearly average exchange rate (available on IRS.gov). Report it as foreign interest income.
Indian tax: India deducts TDS at 30% on NRO interest. You can claim this as a Foreign Tax Credit on your US return (more on this below).
Important: NRE account interest and FCNR interest are tax-free in India. But they are still taxable in the US if you’re a US tax resident. Many NRIs miss this.
2. Rental Income from Indian Property
If you own property in India and earn rent, that rental income must be reported to the IRS.
Where to report: Schedule E (Form 1040) – Supplemental Income and Loss.
How: Report gross rent received, then deduct allowable expenses. Convert all amounts to USD.
Allowable US deductions include:
- Property taxes paid in India
- Repairs and maintenance
- Insurance
- Property management fees
- Depreciation (US rules: 27.5 years straight-line for residential property – this is different from Indian depreciation rules)
Indian tax: Your tenant should deduct TDS on rent. You can claim this Indian tax paid as a Foreign Tax Credit. For more on how TDS works for NRIs, see our detailed guide.
Common mistake: Not claiming depreciation. Even if you don’t claim it, the IRS can recapture it later when you sell the property. Always claim it.
3. Capital Gains from Selling Indian Property
Selling property in India as a US NRI involves both Indian and US tax reporting.
Where to report: Schedule D (Form 1040) and Form 8949.
How it works:
- Calculate your cost basis in USD (using the exchange rate on the date you purchased)
- Calculate sale proceeds in USD (using the rate on the date you sold)
- The difference is your capital gain in USD
Important nuance: Currency fluctuation itself can create a gain or loss. If the rupee weakened between when you bought and sold, your USD gain may be different from your INR gain.
Indian tax: India deducts TDS at 12.5% on long-term capital gains (property held over 2 years) for NRIs, as per Budget 2024 changes. You can claim this as a Foreign Tax Credit.
For the full picture on Indian side taxes, see our guide on capital gains tax for NRIs selling property.
4. Dividends from Indian Stocks
If you hold Indian stocks directly (not through mutual funds), dividends are taxable.
Where to report: Schedule B (Form 1040).
How: Report as ordinary dividend income in USD.
Indian tax: India deducts TDS at 20% on dividends paid to NRIs. Claim as Foreign Tax Credit.
Note: Direct Indian stocks are NOT classified as PFICs. This distinction matters enormously, as we’ll discuss below.
5. Capital Gains from Indian Stocks
When you sell Indian stocks held through your PIS (Portfolio Investment Scheme) account, gains are taxable in both countries.
Where to report: Schedule D and Form 8949.
Indian tax: Short-term gains (held less than 12 months) taxed at 20% in India. Long-term gains (above Rs 1.25 lakh) taxed at 12.5%. Claim as Foreign Tax Credit.
For a deeper look, see our guide on stock trading for NRIs.
6. Indian Mutual Funds – The PFIC Nightmare
This is where it gets painful.
The IRS classifies nearly all Indian mutual funds – equity, debt, hybrid, ETFs, even ULIPs – as Passive Foreign Investment Companies (PFICs).
PFICs have some of the most punitive tax rules in the entire US tax code.
What happens with PFICs:
Under the default “Excess Distribution” method, your gains are taxed at the highest marginal rate (37% in 2025/2026) regardless of your actual tax bracket. On top of that, the IRS charges interest for each year you held the investment, as if you owed tax every year but deferred payment.
A community member’s Rs 10 lakh gain on Indian mutual funds ended up with an effective tax rate of over 50% once interest charges were added. He was in the 24% bracket for his salary.
What you must file: Form 8621 – one separate form for each mutual fund you own. If you have 8 funds, that’s 8 forms.
Filing threshold: Generally required if aggregate PFIC value exceeds $25,000 (single) or $50,000 (joint). But if you sold any fund or received any distribution, you must file regardless of amount.
The Mark-to-Market election: If you make this election in your first US tax year, you report unrealized gains/losses annually as ordinary income. This avoids the punitive default method. It’s the most commonly recommended approach.
Critical warning: If you don’t file Form 8621, the statute of limitations on your entire tax return stays open indefinitely. The IRS could audit your 2024 return in 2035 because of one missing mutual fund form.
What’s NOT a PFIC: Direct stocks (Reliance, Infosys, etc.), fixed deposits, PPF, NPS, and bank accounts. These have their own reporting requirements but don’t fall under the PFIC regime.
My honest recommendation: For US-based NRIs, Indian mutual funds create enormous compliance headaches. Many tax advisors in our community recommend selling Indian mutual fund holdings and investing instead through US-listed India ETFs (like iShares MSCI India ETF) or direct Indian stocks. The tax simplification alone is worth it.
For more on how Indian mutual funds interact with US tax rules, see our guide on NRI mutual fund investments.
The Foreign Tax Credit: Your Best Friend (Form 1116)
The India-US DTAA exists to prevent double taxation. The primary way you use it on the US side is through the Foreign Tax Credit.
How it works: For every dollar of Indian tax you paid (TDS on rent, interest, capital gains, dividends), you can claim a credit that directly reduces your US tax bill. Dollar for dollar.
Where to report: Form 1116 (Foreign Tax Credit).
Which category: Most Indian income falls under either “Passive Category Income” (interest, dividends, rental) or “General Category Income.”
Simplified method: If your total foreign taxes are $300 or less ($600 for married filing jointly) and all from passive income, you can claim the credit directly on Form 1040 without filing Form 1116.
Key rules:
- The credit cannot exceed the US tax on that same foreign income. If India taxed you more than the US would have, the excess carries forward for 10 years.
- You must convert Indian taxes to USD using the exchange rate on the date you paid (or use the yearly average rate).
- Keep your Form 26AS (Indian tax credit statement) as proof of Indian taxes paid.
| Indian Income Type | India TDS Rate | IRS Form | FTC Available? |
|---|---|---|---|
| NRO Interest | 30% | Schedule B | Yes |
| Rental Income | 30% | Schedule E | Yes |
| Long-term Capital Gains (Property) | 12.5% | Schedule D | Yes |
| Indian Income Type | India TDS Rate | IRS Form | FTC Available? |
|---|---|---|---|
| Short-term Stock Gains | 20% | Schedule D | Yes |
| Dividends | 20% | Schedule B | Yes |
| Mutual Fund Gains (PFIC) | Varies | Form 8621 | Limited |
Pro tip from our community: Get your TDS refund from India first (by filing Indian ITR), then claim only what you actually paid as your Foreign Tax Credit. Some NRIs claim the gross TDS on the US side, then get a refund from India, and forget to adjust – this creates a mismatch.
For the full Indian side of filing, see our guide on ITR filing for NRIs.
FBAR: The Form Most NRIs Forget (FinCEN Form 114)
FBAR stands for Foreign Bank Account Report.
Who must file: Any US person who had an aggregate balance of more than $10,000 across all foreign financial accounts at any time during the year.
This includes your NRE account, NRO account, FCNR deposits, demat account, PPF, Indian savings accounts – everything. If the combined highest balance across all these accounts exceeded $10,000 at any point (even for one day), you must file.
Where to file: Electronically through FinCEN’s BSA E-Filing system. This is NOT filed with your tax return. It’s a separate filing.
Deadline: April 15, with an automatic extension to October 15.
Penalties for not filing:
- Non-willful violation: Up to $16,536 per violation (2025 amount, adjusted annually)
- Willful violation: Up to $100,000 or 50% of account balance, whichever is greater
- Criminal penalties possible in extreme cases
A member in our Bay Area group didn’t file FBAR for 4 years. He had about $80,000 across his NRE and NRO accounts. When he finally came into compliance through the Streamlined Filing Procedures, it cost him significant stress and professional fees.
Don’t ignore this. It’s one of the easiest forms to file and one of the most expensive to skip.
For more details, see our comprehensive FBAR guide.
Form 8938: FATCA Reporting
This is separate from FBAR. Yes, you may need to file both.
Form 8938 (Statement of Specified Foreign Financial Assets) is filed with your tax return.
Filing thresholds (living in the US):
| Filing Status | Year-End Value | Any Time During Year |
|---|---|---|
| Single | Over $50,000 | Over $75,000 |
| Married Filing Jointly | Over $100,000 | Over $150,000 |
What to report: Foreign bank accounts, mutual funds, stocks, insurance policies with cash value, demat account holdings, pension interests, and more.
Overlap with FBAR: Yes, there’s overlap. Many accounts must be reported on both FBAR and Form 8938. They serve different purposes (FBAR is a Treasury Department requirement; Form 8938 is an IRS requirement).
For more on FATCA obligations, see our FATCA guide.
The India-US DTAA: How It Protects You
The Double Taxation Avoidance Agreement between India and the US ensures you’re not taxed fully in both countries on the same income.
How it works in practice:
- You earn rental income in India. India deducts TDS.
- You report the same income on your US return.
- You claim the Indian tax paid as a Foreign Tax Credit on Form 1116.
- Your US tax on that income is reduced by the Indian tax already paid.
For most income types, the DTAA allocates primary taxing rights to one country and allows a credit in the other.
For capital gains on property: Both countries can tax. But the US gives credit for Indian tax paid.
For interest income: Both can tax, but withholding is limited to 15% under the treaty. India often withholds 30%, but you can claim treaty benefits to get a refund of the excess from India (by filing Form 10F and providing a Tax Residency Certificate from the US).
Getting a US Tax Residency Certificate: File Form 8802 with the IRS. They’ll issue Form 6166, which is your proof of US tax residency. You’ll need this to claim treaty benefits in India.
Common Mistakes (I’ve Seen All of These)
Mistake 1: Not reporting NRE interest on US returns.
NRE interest is tax-free in India. But it’s fully taxable in the US. This trips up almost everyone. You must report it on Schedule B.
Mistake 2: Using the wrong exchange rate.
The IRS wants USD amounts. Use the IRS yearly average exchange rate for income received throughout the year. For one-time transactions (property sale), use the rate on the specific date.
Mistake 3: Not filing FBAR because “my balance is small.”
The $10,000 threshold is aggregate across ALL foreign accounts. Your NRE ($5,000) + NRO ($3,000) + demat ($3,000) = $11,000. That triggers FBAR.
Mistake 4: Holding Indian mutual funds without filing Form 8621.
This is the single most expensive compliance mistake US NRIs make. The PFIC rules are brutal. Either file properly or, better yet, restructure out of Indian mutual funds into direct stocks or US-listed India ETFs.
Mistake 5: Claiming Indian tax deduction instead of credit.
You can either deduct foreign taxes (Schedule A) or claim a credit (Form 1116). The credit is almost always better because it reduces your tax dollar-for-dollar. A deduction only reduces your taxable income.
Mistake 6: Not filing an Indian ITR to claim TDS refund.
If India deducted 30% TDS on your NRO interest but your actual Indian tax liability is lower, you’re entitled to a refund. File your Indian ITR to get it. Then use the actual net tax paid for your US Foreign Tax Credit.
Mistake 7: Forgetting to report Indian assets on Form 8938.
Your NRE account, NRO account, demat holdings, mutual funds, insurance policies – if they exceed the threshold, they all go on Form 8938.
Key IRS Deadlines
| What | When | Extension |
|---|---|---|
| Form 1040 (tax return) | April 15 | October 15 (with Form 4868) |
| FBAR (FinCEN 114) | April 15 | Auto-extended to October 15 |
| Form 8938 | Filed with 1040 | Same as 1040 extension |
| Form 8621 (PFIC) | Filed with 1040 | Same as 1040 extension |
Note: If you’re living outside the US on April 15, you get an automatic 2-month extension to June 15 (but interest on any tax owed still starts from April 15).
Frequently Asked Questions
Q: Do I need to report Indian income even if I already paid tax in India?
Yes. The US taxes worldwide income. India taxing it doesn’t exempt you from US reporting. You avoid double taxation through the Foreign Tax Credit, not by skipping the reporting.
Q: Is my EPF/PPF reportable to the IRS?
Your EPF and PPF must be reported on FBAR (as foreign financial accounts) if your aggregate foreign account balances exceed $10,000. They may also need to go on Form 8938. The growth in these accounts may be taxable in the US annually, though the treaty treatment is debated. Get professional advice on this specifically.
Q: Can I use the DTAA to avoid PFIC taxation?
No. The India-US DTAA does not override PFIC rules. PFIC is a US domestic anti-deferral provision. While you can claim Foreign Tax Credit for Indian taxes paid on mutual fund gains, you cannot use the treaty to escape the PFIC reporting or interest charge regime.
Q: I didn’t file FBAR for past years. What do I do?
If it was non-willful (you genuinely didn’t know), the IRS Streamlined Filing Compliance Procedures may help. You file 3 years of amended returns and 6 years of FBARs, pay any back tax, and certify it was non-willful. This avoids the harshest penalties. Do this with a qualified professional.
Q: My Indian rental income is only Rs 15,000/month. Do I really need to report it?
Yes. There is no minimum threshold for foreign income reporting. Even $200/year in Indian interest must be reported. The IRS expects complete disclosure of worldwide income.
Q: Should I use TurboTax or a CPA for this?
If you only have NRO interest and no other Indian assets, TurboTax handles it fine. If you have rental income, capital gains, mutual funds, or significant foreign accounts, use a CPA who specializes in NRI/expat taxation. The PFIC forms alone are complex enough to justify professional help.
Q: What if my spouse is not a US person? Do I still report Indian joint accounts?
If you’re filing Married Filing Jointly and your spouse is a US tax resident, yes – all joint accounts are reportable. If your spouse is a non-resident alien and you’re filing separately, only your portion is reportable.
Q: How do I convert INR to USD for tax reporting?
Use the IRS yearly average exchange rate for regular recurring income (interest, rent). For one-time events (property sale), use the spot rate on the transaction date. IRS publishes yearly average rates on their website.
The Bottom Line
US tax compliance on Indian income is not optional. It’s not something you can deal with “later.” And it’s not something your regular Indian CA can handle.
You need someone who understands both systems. A CPA or Enrolled Agent who specializes in NRI/expat taxation. Yes, it costs money. But the penalties for non-compliance – $16,536 per FBAR violation, indefinite statute of limitations for missing PFIC forms, potential criminal liability for willful evasion – make professional help one of the best investments you’ll make.
Get your records organized. File everything. Claim every credit you’re entitled to. And sleep well knowing you’re on the right side of the IRS.
Disclaimer: This guide is for informational purposes only and does not constitute tax or legal advice. US tax laws are complex and change frequently. Always consult a qualified US tax professional (CPA or Enrolled Agent) who specializes in international taxation for advice specific to your situation.
Sources: IRS.gov (Forms 1040, 1116, 8938, 8621, FinCEN 114), India-US DTAA text, India Income Tax Act, and practical experiences shared by BacktoIndia community members.
If you’re planning your move back, join our WhatsApp community at https://backtoindia.com/groups – 20,000+ NRIs helping each other with real, lived experience. It’s free and volunteer-run.
Leave a Reply