Tax guidance for US citizens relocating to India

This article is meant to be a broad level tax guidance for US citizens relocating to India. In this article I will explain broadly how the tax system works and what are your overall reporting obligations to the IRS. The manner of reporting each specific item such as salary, interest and how to avail tax benefits in order to avoid double taxation is covered separately in each of the specific sections. You can find that information by navigating to that particular topic on this website.

Broadly, as a Green Card holder or a resident alien, your worldwide income is generally subject to US taxation. If you are planning to relocate to India or of you have recently relocated, you will now be governed by the Income Tax laws in India, Income Tax laws in the US and the Double Tax Avoidance Agreement (DTAA) signed between India and the US. Broadly as per these laws, following is your tax position in India and in the US:

Tax position in the US: If you are a US Green Card holder, or a resident alien, your global needs to be disclosed on your US return. It means that the salary earned in India, any other source of income in India like bank interest, income from rental property, sale of property etc is required to be disclosed on the US tax return. You may also have to file a US state return depending upon the rules of every state.

Tax position in India : Since you are residing and earning income in India, you will be required to follow India tax rules as well. In India, for tax purposes, your status would fall under one of the following categories: Resident (R), Resident but not ordinarily resident (RNOR) or Non resident (NR). When you relocate to India, depending on your date of relocaton, you would be a NR or RNOR for the first 2-3  years. During this time period, your US income will not have to be reported on India tax returns. Once you become a tax resident in India (after the 2-3 year time period as applicable in your case), your global income will have to be reported on your India tax return.

So now, if you are a “tax resident “ of India and a “citizen or a resident alien” of the US, you will have to report your global income or your world wide income in the tax return of both the countries.

So now will you have to pay “double tax” on the income earned in India as well as in the US?

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No.  We discussed above that if you meet certain conditions, you will have to “report” your global income in the tax return of both the countries.  “Reporting” your global income does not mean “paying taxes” on your income in both the countries.

India has signed a Double Taxation Avoidance Agreement (DTAA) with the US which helps to avoid paying taxes twice on the same income in both the countries. These tax deductions are available in various forms such as “Foreign Earned Income Exclusion (Form 2555)”, “Foreign Tax Credit (Form 1116)” and some other deductions which have been discussed in detail on this website.

There are various sections in the income tax laws which help you to get a relief from paying double taxes. However, it is absolutely necessary to have a thorough understanding of these laws to be able to compute your taxes correctly.

Although you will now be staying in India, you will not only have to be compliant in filing your US taxes, but also be required to comply with other US regulations such as filing of FBAR (Foreign Bank Account Report), FATCA compliances and the new regulations which are introduced from time to time. Let me go over the list of the forms which you need to comply along with  your US tax return.

  1. Form 1040 (you may have to file Forms 2555, 1116 and 8621 as a partof your tax return)
  2. State tax return, if applicable
  3. FBAR (Report of Foreign Bank and Financial Accounts)
  4. Form 8938 (Statement of Specified Foreign Financial Assets)
  5. Form 3520 (Annual Report to report transactions with Foreign Trusts and receipts of Foreign Gifts)
  6. Form 5471 (Information return by US persons who are officers, directors or shareholders in foreign corporations)

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