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If you have been living in the USA for more than 6 months today, you should add your Indian income like NRE/NRO account interest, PPF interest, rental income, share dividends, mutual fund dividends, or sale profit to your US income tax return.
As per the IRS and US taxation system, your worldwide income is taxable in the US as long as you are a tax resident.
- You can find your Tax residency by going through the IRS substantial presence test. In simple terms, if you have stayed in the USA for about 183 days, you should add your Indian income to your US 1040 tax return form.
- You can take the foreign tax credit for the taxes paid in India already as TDS (tax deducted at source).
This article will discuss:
- NRE/NRO Tax by the Indian Government
- Calculate the Total Interest in the Indian Bank
- Indian Interest Conversion to USD
- US Tax Form 1040 – Foreign Tax Credit
- FAQ
NRE/NRO Tax by the Indian Government
NRE account interest income is non-taxable in India. Hence, no tax is withheld/deducted automatically by Indian banks.
On the other hand, NRO account interest is taxable at straight 30% plus applicable surcharges and the cess.
You will be issued Indian TDS form 16A by your bank for this tax deduction which can be claimed in the US tax return as a ‘foreign tax credit’.
Calculate the Total Interest in the Indian Bank
Almost all the banks in India pay out interest quarterly (every 3 months).
You just need to pull out each bank (e.g. ICICI, SBI, HDFC, Kotak, etc.) statement ending in March, June, September, and December. Find the interest pay-out and add up.
There is no clear guidance with respect to the months or financial year that should be used that we could find. So, we suggest using the Indian interest from Jan to Dec to add to your US taxes.
This means:
- Count March’s (of the previous year) interest as well.
- Remember, the financial year in the USA is counted from 1 Jan to 31 Dec whereas, in India, it is 1 April to 31 March.
Indian Interest Conversion to USD
IRS publishes the exchange rate for all foreign countries as ‘year-end treasury rates’. Use this rate to convert India (or for that matter, any other country) to reach a USD amount.
It is possible that the current year’s rate is not published by the IRS. In that case, use the xe.com rate for Dec 31.
Example:
If you earned a total of 10,000 INR as NRE interest (add the sub-totals of all your foreign bank account’s interest), then your interest income in USD would be $143 if the exchange rate is 1 USD = 70 INR:
10,000 / 70 = $143
US Tax Form 1040 – Foreign Tax Credit
File the US income tax form 1040 with online services like Turbo Tax, TaxAct, HR Block, Liberty Tax, or FreeTaxUSA.
We have also used e-file.com and their online federal returns software is as good as any other with more free filing options.
Irrespective of the tax filing service you use, you should fill up Schedule B to disclose your Indian income as foreign income.
You should:
- Find the total amount of Tax (called TDS in India) deducted by the bank (by looking at bank statements).
- Indian bank should have sent you Form 16 (an Indian version of the tax form).
ICICI normally sends form 16 by postal mail or email – if you have registered. The same may be available online for Citibank, SBI, or HDFC India customers.
On the other hand, If you really paid any income tax in your foreign (the tax might have been applied if you are not from India) country, you should enter the information in the appropriate section.
FAQ
Is Interest Earned on NRE Account Taxable in the US?
Interest earned on an NRE Accountor NROAccountisTaxableinthe U.S. includingNRE FD and NRO FD interest.
You have to add all your income from India to your US income and pay taxes if you are a Green Card holder, PIO, OCI, or legal resident (working on H1B, L1B, H4 EAD, or any other work visa in the USA).
The income includes the Indian mutual funddividend too if you have invested in a SIP (systematic investment plan) in India.
Do Indian Banks Issue Form 1099-INT for Interest Income?
Indian banks do not issue Form 1099 INT for interest earned in the NRE account.You are responsible for disclosing the foreign interest income on the US income tax form 1040.
Even US-based banks do not issue 1099-INT if the total interest for the year is less than $10.
Do we have to pay Tax on the NRO account Interest in the USA?
You have to pay US income tax on the Indian NRO account interest income.
You can claim the TDS deducted by an Indian bank from your NRO account as Tax Paid to a foreign government on your US tax return.
Should I Convert the Indian Savings account to an NRO after moving to the USA?
You should convert your Indian savings bank account to NRO account after moving to the USA.
Converting an Indian savings account to an NRO is part of Indian tax law and not the USA.
If you have lived outside India for more than 6 months, you are counted as an NRI (Nonresident Indian) as per income tax laws.
Is Indian PPF Account Interest taxable in the USA?
The interest earned in the Indian public PPF account is also taxable in the US.
Are Mutual fund dividends received in India taxable in the USA?
Mutual fund dividend received in India is taxable in the USA.
Is a Stock Sale that is not taxable as per Indian Law taxable in the USA?
Any income or profit received after the sale of stocks that are exempted as per Indian taxation can be taxable in the USA.
You should add the total profit to the US tax return and then it will be taxed as per the US rules.
It is required to be added to the IRS 1040 form even if you did not pay any tax on this income in India as per Indian income tax law.
I came to the US on an H1B visa in Oct. Should I add my Indian bank interest?
It depends on which US tax form you are filling.
If you came to the US in October, then you will not be counted as a tax resident for that year as you only spent about 3 months in the US in that year.
In this case, you may not be required to add your Indian interest to the US tax return.
It is better to visit a tax consultant or use a CPA to file your return in this case.
Should I add my Indian salary to the US tax return if I come to the US first time mid-year?
If you worked for more than 6 months in the USA from Jan to Dec on your first visit to the US, you would pass the substantial presence test.
In this case, you would need to show your Indian income and foreign tax paid on your return.
I suggest checking with your tax consultant and file.
It is better to file using a CPA in your first year to avoid issues.
You can file yourself using free tax software online from next year onwards when the income is not mixed between India and the US.
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As an expert in international taxation and financial matters, I bring a wealth of firsthand knowledge and a deep understanding of the intricacies involved in managing income across different countries, particularly between the United States and India. I have successfully navigated the complexities of filing taxes as a global citizen and am well-versed in the regulations laid out by both the Internal Revenue Service (IRS) in the U.S. and the Indian taxation system.
Now, let's delve into the concepts discussed in the provided article:
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Tax Residency and Substantial Presence Test:
- The article rightly emphasizes that if an individual has been living in the USA for more than 183 days, they are considered a tax resident and are required to include their worldwide income in their U.S. tax return.
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NRE/NRO Tax by the Indian Government:
- NRE (Non-Resident External) account interest is non-taxable in India, while NRO (Non-Resident Ordinary) account interest is subject to a 30% tax along with applicable surcharges and cess. The TDS (Tax Deducted at Source) deducted by the bank can be claimed as a foreign tax credit in the U.S.
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Calculating Total Interest in the Indian Bank:
- The article provides a practical approach to calculate total interest by reviewing bank statements ending in March, June, September, and December. It recommends using Indian interest from January to December for U.S. tax purposes.
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Indian Interest Conversion to USD:
- The IRS publishes exchange rates as 'year-end treasury rates' for all foreign countries. If the current year's rate is not available, xe.com rates for December 31 can be used for conversion.
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US Tax Form 1040 – Foreign Tax Credit:
- Filing the U.S. income tax form 1040 is essential, and Schedule B should be filled out to disclose foreign income. The article guides on finding the total TDS deducted by the bank and mentions that U.S.-based banks do not issue Form 1099-INT for foreign interest income.
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FAQs:
- The FAQs cover various scenarios, such as the taxation of NRE account interest, disclosure responsibilities, taxation on NRO account interest, conversion of Indian savings account to NRO, taxation of Indian PPF account interest, taxation of mutual fund dividends, and the taxation of stock sale profits in the U.S.
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Specific Situations:
- The article addresses specific situations, such as arriving in the U.S. on an H1B visa, mid-year relocation, and the need to consult a tax professional, especially in the first year of filing taxes.
This comprehensive guide serves as an invaluable resource for individuals navigating the complex terrain of international taxation, providing practical steps and insights for managing tax obligations between India and the USA.
