Income Tax for NRI/PIO/OCI in the USA and India

To learn the tax implications, let us understand the Double Tax Avoidance Act (DTAA) Treaty between US and India.

US - India Tax Treaty: Double Tax Avoidance Act (DTAA)

The US-India Tax Treaty, also known as Double Tax Avoidance Act (DTAA), is an agreement between the United States and India that aims to ensure that NRI/ OCI/ PIOs are not taxed twice on the same income by both countries. The treaty provides for a number of benefits to the NRI, OCI, and PIOs, that includes the following:

• Exemption of certain types of income from taxation in both countries.

• Credit for taxes paid in one country against taxes payable in the other country.

• Limitation on the amount of tax that can be imposed on dividends paid by a company in one country to a resident of the other country.

The DTAA is a valuable tool for NRI/ PIO/ OCIs who want to minimize their tax liability.

How to Avoid Double Taxation?

NRI/ OCI/ PIOs who work in the US and have income from India can avoid double taxation by submitting a Tax Residency Certificate (TRC) issued by the US IRS to the Indian Central Board of Direct Taxes (CBDT).

Important Points for an NRI/ OCI/ PIO to Avoid Double Taxation under US India Tax Treaty:

• Article 15 of the DTAA (Double Taxation Avoidance Agreement) between India and the US allows for this exemption from TDS.

• Physical Presence Test: If you don’t have a green card and spend at least 31 days in the US during the current tax year and a total of 183 days during the last three tax years (inclusive of the current tax year), you’ll usually satisfy the physical presence test and are treated as a resident alien.

• If you fail the physical presence test, you are considered a non-resident alien in the US.

• The TRC will confirm that the NRI is a resident of the US for tax purposes, and therefore their Indian income should only be taxed in the US.

• This means that the Indian Central Board of Direct Taxes (CBDT) will not need to deduct TDS (tax deducted at source) from your income.

Income Tax for NRI/ OCI/ PIO in the USA

Non-Resident Indians (NRI) who are legal US residents are taxed on their income from all sources worldwide, just like US citizens. This means that you have to report all your income in your annual income tax returns, regardless of where you are earning it.

The income tax rules for NRI/ OCI/ PIOs in the USA are complex and depend on a number of factors, like: 

• Length of time you have been in the US.

• Your residency status

• Type of income you earn

Generally, NRIs are taxed on their US-source income, which includes:

• Salary Income

• Business Income

• Contractual/ Freelancing Income

• Income from Rental Properties

• Income from the Sale of Agricultural Land

• Capital Gains

Details of Tax on NRI/ OCI/ PIO in the US and India

1. Income from Salary

   When it comes to income from salary, NRI/ OCI/ PIOs need to understand the tax implications in both the United States and India. 

   A brief overview of how taxes are applied to salary income for NRI in both countries is as follows:

   Taxation on Salary Income of NRI/ OCI/ PIOs in the United States

   • In the USA, NRI, OCI, and PIOs are taxed on their US-source income, which includes salary income. The amount of tax you pay will depend on your residency status and the amount of your income:

     • If you are a "Resident Alien" for tax purposes, you will be taxed on your worldwide income.

     • If you are a "Non-Resident Alien" for tax purposes, you will only be taxed on your US-source income.

   • The US tax rates for NRI/ OCI/ PIO are progressive, which means that the higher your income, the higher your tax rate.

   • In addition to federal income taxes, you may also be subject to state and local income taxes. The amount of state and local income taxes you pay will depend on the state and city where you live.

   Taxation on Salary Income of NRI/ OCI/ PIOs in India

   • In India, NRI, OCI, PIOs are taxed on their worldwide income, regardless of where they live. 

   • However, there are some exceptions to this rule. For example, if you have been in India for less than 182 days in a financial year, you may not be taxed on your salary income.

   • The Indian income tax rates are also progressive, with the highest tax rate being 30%. 

   • However, there are a number of income tax deductions and exemptions that can reduce your taxable income.

2. Freelancing and Contractual Incomes

   Learning about taxation in the US and India is especially applicable to those NRI/ OCI/ PIO individuals with contractual and freelance services in the US but have income from a company in India. 

   Taxation on Freelance/ Contractual Income of NRI/ OCI/ PIOs in the United States

   • If a NRI/ OCI/ PIO is working in the United States but earns income in India, that income would generally be taxable only in the US according to Article 15 of the Double Taxation Avoidance Agreement (DTAA) US India Tax Treaty. 

   • This means that the NRI would not have to pay taxes on that income in India.

   • NRI/ OCI/ PIOs are subject to federal income tax on their freelancing and contractual income earned within the country. 

   • The tax rate is progressive as higher income levels are taxed at higher rates.

   • The NRI may also be subject to state income tax depending on the state in which they perform the work. 

   • It is important for NRIs to determine their tax residency status in the US based on the Substantial Presence Test or other applicable criteria to understand their tax obligations accurately.

   Taxation on Freelance/ Contractual Income of NRI/ OCI/ PIOs in India

   • In India, the tax treatment of freelancing and contractual income for NRI, OCI, PIOs depends on their residential status.

   • If an NRI performs freelancing or contractual work in India, the income is generally taxable in India.

   • However, if an NRI is a resident of the US with which India has a DTAA (Double Taxation Avoidance Agreement), the income may be taxed in the US, depending on the provisions of the treaty.

   

3. Rental Income

   NRI/ OCI/ PIOs are taxed on their rental income in both the USA and India. The amount of tax you pay will depend on the country where the property is located and your residency status.

   The taxation of rental income of an NRI in the United States depends on the US- India tax treaty.

   Under the DTAA tax treaty of the US- India, rental income from immovable property located in India may be taxed in India or in the United States. The country of taxation will be determined based on the following factors:

   • Place of Residence: If the NRI/ OCI/ PIO is a resident of India for tax purposes, the rental income will be taxed in India.

   • Days of Presence in India: If the NRI is not a resident of India for tax purposes, but is present in India for more than 182 days in the fiscal year, the rental income will be taxed in India.

   • Double Taxation Avoidance Agreement: The India-US tax treaty provides for a mechanism to prevent double taxation of rental income. If the rental income is taxed in India, the NRI, OCI, or PIO can claim a tax credit in the United States for the taxes paid in India.

4. Income from the Sale of Agricultural land

   The taxation criteria on NRI, OCI, and PIOs in the US and India for the income from the sale of agricultural land are as follows:

   Taxation of NRI/ OCI/ PIO on Income from the Sale of Agricultural Land in the United States

   • The income from the sale of agricultural land is taxable in the US for NRI, OCI, and PIOs.

   • The capital gains tax will be calculated as per the applicable US tax rates.

   • The NRI/ OCI/ PIO may be able to claim a foreign tax credit in the US for the taxes paid in India.

   Taxation of NRI/ OCI/ PIO on Income from the Sale of Agricultural Land in India

   • The income from the sale of agricultural land is not taxable in India for an NRI, OCI, or PIO.

   • However, if the agricultural land is sold within 3 years of inheritance, the NRI will be liable to pay capital gains tax.

   • The capital gains tax will be calculated as per the applicable income tax slab rates.  

5. Tax on Capital Gains 

   The taxation criteria on NRI, OCI, and PIO for capital gains in US and India are as per the following rules:

   Taxation of NRI/ OCI/ PIO on Capital Gains from the Sale of Assets in the United States

   • The tax treatment of capital gains for NRI, OCI, and PIO depends on whether the capital asset is held for the short-term or long term.

   • Short-term capital gains are taxed as per the applicable US income tax rates.

   • Long-term capital gains are taxed at a preferential rate of 0%, 15%, or 20%, depending on the taxpayer's income and filing status.

   • NRI/ OCI/ PIOs can also claim a foreign tax credit in the US for the taxes paid in India.

   Taxation of NRI/ OCI/ PIO on Capital Gains from Sale of Assets in India

   • The tax treatment of capital gains for NRI, OCI, and PIO depends on whether the capital asset is held for the short term or a long term.

   • Capital Gains from Sale of Property, Assets, or Land:

     • If you sell the physical property after 3 years of purchase, it is termed as long-term capital gains. Such gains are taxed at a flat rate of 20%.

     • If you gain from selling your physical assets before holding them for 3 years, it is termed as short-term capital gains. These gains are taxed as per the applicable income tax slab rates.

   • Capital Gains from the Sale of Shares, Mutual Funds, and Other Financial Assets:

     • NRI/ OCI/ PIO are liable to pay TDS (tax deducted at source) at 20% on Long Term Capital Gains (LTCG) from selling of assets after 1 year.

     • A TDS is deducted at 15% for Short-Term Capital Gains (STCG) from selling the assets within 1 year.

     • NRI/ OCI/ PIO are not eligible for the indexation benefit, which is a method of adjusting the cost of acquisition of an asset for inflation.

   • The NRI may be eligible for certain exemptions and deductions, such as the indexation benefit and the exemption for the sale of a residential house.

   Capital Gain Taxation

   The following table represents the above capital gain tax discussion: 

   Type of Funds	India		US
   	Short-Term Capital Gains (STCG) Tax	Long-Term Capital Gains (LTCG) Tax	Short-Term Capital Gains (STCG ) Tax	Long-Term Capital Gains (LTCG ) Tax
   Equity  Mutual Funds	15% (if sold in a year)	10% without Indexation	All short-term gains are added to the total income	All LTCGs taxed at uniform 15%
   Debt Mutual Funds	As per tax slab (if sold within 3 years)	20% after Indexation (after 3 years)	**No adjustment for Rs. 2.5 lakhs basic exemption relief for NRI/ OCI/ PIO
   Balanced Mutual Funds	15% (if sold within a year)	10% without Indexation

   “Tax benefit is subject to changes in tax laws. Standard T&C apply.”

6. Income from Interest Generated 

   The taxation rules in USA and India for NRI/ OCI/ PIO on income from interest earned are as follows:

   Taxation of NRI/ OCI/ PIO in the United States on Income from Generated Interest

   • Interest income earned by NRI, OCI, and PIO from US sources is taxable in the US.

   • The interest income is taxed at the same rates as the NRI's other income.

   • NRIs may be able to claim a foreign tax credit in the US for the taxes paid in India.

   Taxation of NRI/ OCI/ PIO in India on Income from Generated Interest

   • Interest income earned by NRI, OCI, or PIO from Indian sources is taxable in India.

   • The interest income is taxed at the same rates as the NRI's other income.

   • NRI, OCI, and PIO are liable to pay TDS (tax deducted at source) on interest income. 

   • The TDS rate is 30% for interest income from NRO accounts and 20% for interest income from FCNR accounts.

   

7. Income from Dividends

   Any income from dividends in India and US is taxed as per the following for NRI, OCI, and PIO:

   Taxation of NRI/ OCI/ PIO in United States on Income from Generated Interest

   • Dividend income earned by NRI, OCI, and PIO from US sources is taxable in the US.

   • The dividend income is taxed at the same rates as the NRI's other income.

   • NRI may be able to claim a foreign tax credit in the US for the taxes paid in India.

   • NRIs need to report “Interest and dividends “income in Schedule B of Form 1040. Form 1116 can be used for foreign tax credits.

   Taxation of NRI/ OCI/ PIO in India on Income from Generated Interest

   • Dividend income earned by NRI, OCI, and PIO from Indian sources is taxable in India.

   • The dividend income is taxed at a flat rate of 20% without providing for deduction under any provisions of the Income Tax Act, 1961.

   • NRIs are liable to pay TDS (tax deducted at source) on dividend income. 

   • The TDS rate is 20% for dividend income from shares and 10% for dividend income from mutual funds.

8. Exempted Income

   There are certain types of income that are exempt from tax for NRI/ OCI/ PIO in US and India. 

   Tax Exemption for NRI/ OCI/ PIO in United States

   • Interest income from US government bonds

   • Dividend income from US companies

   • Income from certain other sources specified in the US tax code

   Tax Exemption for NRI/ OCI/ PIO in India

   • Interest income from NRE accounts

   • Dividend income from NRE accounts

   • Income from pension plans

   • Income from life insurance policies

   • Income from foreign employment

   • Income from certain other sources specified in the Income Tax Act, 1961

How to Report Taxes? 

NRI/ OCI/ PIO who have income in the United States are required to file a tax return with the Internal Revenue Service (IRS).

There are two main ways to file a tax return as an NRI:

• File Form 1040 NR: This is the traditional way to file a tax return as an NRI. You will need to complete Form 1040NR and attach any necessary schedules.

• File Form 1040 and use the Foreign Earned Income Exclusion (FEIE): The FEIE allows you to exclude a certain amount of your foreign-earned income from taxation. If you qualify for the FEIE, you will need to file Form 2555 with your Form 1040.

Wrapping It Up

Non-Resident Indians (NRI/ OCI/ PIO) need to navigate the tax systems of both the United States and India to properly manage their tax obligations. Understanding the tax rules and regulations in each country is crucial for NRI, OCI, and PIO to ensure compliance and minimize any potential double taxation.