Income tax regulations play a significant role in the financial lives of Non-Resident Indians (NRI), Persons of Indian Origin (PIO), or Overseas Citizen Of India(OCI) who have income sources in both the United States and India. As an NRI, it is essential to understand the income tax frameworks of both countries to effectively manage your tax obligations and optimize your tax planning. This brief introduction provides a concise overview of the key considerations and obligations that need to be taken into account while earning income in these countries.
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To learn the tax implications, let us understand the Double Tax Avoidance Act (DTAA) Treaty between US and India.
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.
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.
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:
Contractual/ Freelancing Income
Income from Rental Properties
Income from the Sale of Agricultural Land
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:
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.
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.
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.
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.
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.
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.
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:
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.
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.
The taxation criteria on NRI, OCI, and PIO for capital gains in US and India are as per the following rules:
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.
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.
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.”
The taxation rules in USA and India for NRI/ OCI/ PIO on income from interest earned are as follows:
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.
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.
Any income from dividends in India and US is taxed as per the following for NRI, OCI, and PIO:
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.
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.
There are certain types of income that are exempt from tax for NRI/ OCI/ PIO in US and India.
Interest income from US government bonds
Dividend income from US companies
Income from certain other sources specified in the US tax code
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
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.
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.
NRI, OCI, and PIOs who are considered residents of the US for tax purposes may also be subject to state and local taxes.
|Taxable Income||Tax Rates for NRI/ OCI/ PIO in the US.|
|Tax Slab for Single Filing||Tax Slab for Married Filing Jointly|
|$0 - $9,950||$ 0 to $ 9,950||10%|
|$9,951 - $40,425||$ 9,951 to $ 40,425||$ 9,951 to $ 40,425|
|$40,526 - $86,375||$ 40,526 to $ 86,375||$ 40,526 to $ 86,375|
|$86,376 - $1,64,925||$ 86,376 to $ 1,64,925||$ 86,376 to $ 1,64,925|
|$164,926 - $2,09,425||$ 164,926 to $ 2,09,425||$ 164,926 to $ 2,09,425|
|$209,426 - $5,23,600||$ 209,426 to $ 5,23,600||$ 209,426 to $ 5,23,600|
|Income greater than $5,23,600||Income greater than $ 5,23,600||Income greater than $ 5,23,600|
For the 2023 tax year, the Foreign Earned Income Exclusion (FEIE) is as follows:
Single: Up to $112,000
Married Filing Jointly: Up to $224,000
Married Filing Separately: Up to $112,000
Head of Household: Up to $157,000
File Form 1040 NR
File Form 1040 and use the Foreign Earned Income Exclusion (FEIE)
Past 10 Year annualised returns as on 01-12-2023
^Tax benefit are for Investments made up to Rs.2.5 L/ yr and are subject to change as per tax laws.
*All savings are provided by the insurer as per the IRDAI approved insurance plan.
Tax benefit is subject to changes in tax laws. Standard T&C Apply
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