Is India dividend income taxed on US tax return?

Should India dividend income be taxed on US tax return?

In this article, let us see how India dividend income is taxed on US tax return.

Current India tax rules

Dividend income is not taxed in India as per the prevailing tax laws. Therefore you do not pay tax on dividend income earned in India. Most individuals think that since they are now staying in India and are bound by the tax rules in India, they need not offer this income for tax in the US.

Current US tax rules

Dividend income is taxed in the US as per the current US tax rules.

How do these rules affect you as a US citizen or a green card holder?

Remember the fundamental rule that all US citizen or green card holders have to disclose their global income in the US. This income is then taxed in the US applying the US tax rules and the double taxation avoidance agreement (DTAA) between India and US.

Now applying this rule, you will have to disclose India dividend income on your US tax return. You may probably be thinking that even though you have to disclose this income, you can avail foreign tax credit – a credit of the taxes paid in India in order to avoid US taxes. But please remember that, foreign tax credit is a credit of taxes paid in a foreign country. You can read more on foreign tax credit here. In this case, since you have not paid tax on this income in India, the question of foreign tax credit or double taxation does not arise. Therefore, you will not be able to claim the benefit of foreign tax credit on your US tax return.

Conclusion :

You will have to declare India dividend income on your US tax return and pay tax to the IRS at the prevailing tax rate.

Eaxmple:

Let’s say you receive a dividend income of $ 100 in India. As per current Indian tax rules, this income will be tax free in India. However, you will have to include this income on your US tax return and report it on Form 1040.

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