NRI Tax USA

Taxes collected from citizens are the primary income of any country. For India as well, the income tax collected forms the most sizable chunk of government earnings. Calculating the tax one owes to the government is a complicated process, and for NRIs in the US, the complications are doubled.

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Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

This, however, comes with its own set of benefits and drawbacks. Although paying taxes in both countries is at times unavoidable, for most of it, the two countries have their treaties that protect NRI's, like the Double Tax Avoidance Agreement.

Global Income Taxation in the US for NRIs

For NRI tax in the US, whether one is a US resident or US citizen in any of the NRI, PIO, or OC categories, the individuals need to pay taxes on their global income in the US.

The income earned by the NRIs in India gets taxed in the US in a particular way as per their taxation norms. Listed below are the criterion based on, which there may be NRI Taxation in the USA:

Income from Salary

The Indian taxation of income differs from that in the US in many aspects. In India, if an individual gets a salary package with various components, each component of the salary package is taxed differently. Individuals can also get tax deductions or tax exemptions in case of any medical reimbursements and allowances.

The salary in the US, however, does not follow such taxation criteria. Whatever income is received by an individual, it becomes taxable. In India, the much-known Form 16 contains the taxable components of your salary. On the contrary, if an individual or an NRI files an ITR in the US, one needs to disclose all the tax-free components in the salary received in India. At the same time, these individuals also need to pay taxes in the US on those components.

According to Article 15 of the DTAA, a person who is a particular country’s resident but has income from a foreign country source, his income would be taxed ‘only’ in the residential country.

This means if an NRI works in the US and his income comes from an Indian source, he has to pay only US taxes. For this, one needs to inform his Indian payer not to deduct TDS. He needs to submit a Tax Residency Certificate for this purpose to his payer in India, issued by the US IRS. If an NRI fails to submit the certificate and his Indian employer deducts TDS, he can still claim a tax credit on that deduction in his US tax return.

How to report taxes: NRIs need to use the tax return Form 1040 to include their income from salary in India. For claiming a tax return or tax credit, one needs to fill Form 1116.

Note: One thing to note here is that while Indian taxation laws follow the financial year starting from April to March next year, the US taxation system follows the calendar year. Hence, income for taxation purposes is calculated on a pro-rata basis.
Freelancing and Contractual Incomes

This is especially applicable to those NRI individuals with consultation services in the US but has income from a company in India. In this scenario, the related NRIs are liable for tax on that income in the US. This tax must be paid whether one receives the income in a US bank account or an Indian bank account.

Here the DTAA or the Double Tax Avoidance Agreement provisions need to be taken into consideration.

If an NRI working in the US has an income in India, that income would be taxable only in the US, as stated by Article 15 of the DTAA. Again a Tax Residency Certificate provided by the NRI in India will exempt his income from taxes cut at the source. If the taxes have been deducted in India, the NRI can file for tax claim on that amount in the US.
Rental Income

If an NRI is the owner of an Indian property on rent, his rental income will be taxed in the US. As per Article 6 of the DTAA, any rental income from an immovable property 'maybe' taxed in the country where the property is located. So US NRIs are liable for tax on any income from rent in India. However, this income has to be declared by the NRIs at the time of filing their US tax return. They would get a tax credit for taxes paid in India.

Note: A point to note here is that salary and contractual income are 'only' taxed in the country of residence. However, rental income taxation is available to both countries. The country where the property is located has the first right. So the NRI will pay the tax on his rental income in India as per his available Indian tax slab first.

How to declare taxes: Post this, the rental income has to be declared by the NRI taxpayer in the US. The tax on his total income is then calculated based on his US tax slab. The NRI individual can file for a tax credit in the US for any taxes that he has paid in India.

How to file: For tax returns, NRIs in the US need to fill up Form 1040 Schedule E. Taxation in India allows a 30% deduction from rental income. In the US, the actual expenses, like, maintenance and repair, are deducted. One needs to fill Form 1116 tax credit claims.

Note: One has to remember that if an NRI owns property in India and he does not pay taxes on that rental income in India but pays tax on the same income in the US, one may have an issue with tax authorities for assessment in India.
Income from the Sale of Agricultural land

The sale of agricultural land in India falls under the tax-free category. However, in the US, it is taxable. Income generated by an NRI from selling the agricultural property will have to be declared in the US and taxed as a part of global income.

Capital Gains

Any income made from the sale of capital assets like land, property, stocks, shares, mutual funds, etc., is known as a Capital gain. The time period to determine an asset as a long-term capital gain or a short-term one is different in India and the USA. This again poses problems for NRI's. It may end up in NRI's paying tax on their sales in India and additional tax on the remaining amount in the US as well, though tax credit in the US may be claimed. This again might end up as a double taxable asset to an NRI.

Capital Gain Taxation in India

The taxation in India for capital gains follows these rules:

For gains physical assets, property, or land:

Gains on sale are classified as short-term ad long-term capital gains.

Long-term Capital Gain: Any gain on sale of physical assets after 3 years of purchase is known as a long-term capital gain. It is taxed at the rate of 20%.

Short-term Capital Gain: Any gain on sale below 3 years is known as short-term capital gains. It is included in the total income of the NRI and taxed at his overall tax slab.
Shares, Mutual funds, and other financial assets:

Any individual who has capital gains from equity shares and mutual funds that he sells after 1 year is exempt from tax.

However, if one sells within one year, a tax is charged at 15% of the capital gain.

For debt mutual funds and debentures, if they are gains on sale after holding for 1 year, they are taxed as long-term capital gains. The tax rate is 20% with indexation or 10% without indexation.

Sale within 1 year is taxed as short-term capital gains and included in your total income and taxed at your overall tax slab.

Capital Gain Taxation in the US

The US Law has the same period for long-term capital gain is 1 year for all assets. Short-term gains are added to your total income, while Long term capital gains are taxed at the rate of 15%.

The following table represents the above capital gain tax discussion:

Capital Gain Taxation

	India		US
Type of Funds	STCG or Short Term Capital Gains Tax	LTCG or Long Term Capital Gains Tax	STCG or Short Term Capital Gains Tax	LTCG or Long Term Capital Gains Tax
Equity Mutual Funds	15% (if sold in a year)	10% without Indexation	All short term gains are added to total income	All LTCG 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 NRIs
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.”

Income from Interest Generated

For any Indian resident, the income from interests is added to their total income, and then it is taxed according to the overall tax slab. This is generally 30% of the income from interest. Interest generated in India or the USA are added to the global income of the NRI and taxed according to the slab it falls in. This might differ in the US, subject to the laws of the state that the NRI resides in. However, in the presence of DTAA, if an NRI earns interest on account of deposits in India, he will have a tax deduction or TDS on the same in India at a reduced 15 % rate.

Income from Dividends

Any income from dividends in India is tax-free. However, in the US, dividends are added to the total income and taxed.

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

Foreign Tax Credit Limit in the US

NRIs in the US can claim a tax credit, but the IRS has put a cap on it. Form 1116 is to be used for this. This indicates that the foreign tax credit should be in accordance with US tax liability in the same proportion as the NRI’s foreign income is to total income.

It should be remembered that taxes vary in the US from state to state. Therefore, taxes paid by NRI's in various states differ too.

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-12-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in 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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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).