Green Card and OCI: U.S. Worldwide Tax Residency Explained

(UNITED STATES) Indian immigrants holding a U.S. Green Card and an OCI card are finding that their tax bills do not stop at the border, even when life shifts back to India. The rules are not new, but they continue to catch people off guard: the United States taxes Green Card holders on their worldwide income until they formally give up permanent resident status, and an OCI — the Overseas Citizen of India card that eases long-term entry to India — does not change that.

Professionals who split time between the two countries, or who build assets on both sides, have been learning that the global tax net remains in place until the Green Card is surrendered through USCIS Form I-407, and in some cases a final U.S. exit tax return (Form 8854) is required if income or net worth meets certain thresholds.

U.S. tax residency for Green Card holders

The U.S. system treats Green Card holders as U.S. tax residents wherever they live. That means the Internal Revenue Service expects an annual Form 1040 reporting all worldwide income — salary, dividends, interest, rental income, and capital gains — whether earned in Mumbai, Bengaluru, or San Jose.

Disclosure duties extend beyond paychecks:

• Foreign financial accounts and specified assets generally must be reported on the FBAR (FinCEN 114).
• FATCA requires reporting on Form 8938 when thresholds are met.

According to analysis by VisaVerge.com, many Indian families returning with an OCI incorrectly assume that spending most of the year in India ends U.S. tax responsibilities; in practice, nothing changes for U.S. tax status until the Green Card is surrendered and the process is documented.

Why the confusion happens: immigration vs. tax tests

The frequent misunderstanding comes from mixing immigration residence tests with tax residence rules.

• In India, spending 183 days in the country can make someone a tax resident under Indian law.
• At the same time, the person can remain a U.S. tax resident because they still hold a Green Card.

The result is overlapping obligations: India taxes income sourced in India, while the United States taxes global income. Relief is available through the India–U.S. double tax treaty, but the treaty does not remove filing duties in either country. Instead, it allows taxpayers to claim a Foreign Tax Credit to avoid double taxation, typically through:

• Form 1116 in the United States
• Form 67 in India

The treaty also includes a residency tiebreaker when both countries claim residency. It looks at:

1. Where the person has a permanent home
2. Where personal and economic ties are strongest
3. Where they usually live
4. Citizenship (if earlier steps do not resolve the issue)

For many Green Card holders who still have U.S. employment, bank accounts, and dependents in America, the U.S. side often remains the deciding factor.

None of this removes the basic duty that a Green Card holder must file a Form 1040 every year unless they have formally surrendered the Green Card or had it rescinded. Simply holding an OCI or living mainly in India does not terminate U.S. tax status.

Practical tax implications for common income types

Practical effects show up across common income sources in India:

• Salary: Taxed in India and still included on the U.S. return; taxpayers can claim credits.
• Rental income: Must be reported on Schedule E in the U.S. and on the Indian return; credits can be used to reduce double taxation.
• Indian mutual funds: Often treated as Passive Foreign Investment Companies (PFICs) for U.S. tax purposes, creating punitive tax treatment and complex annual reporting.
• NRE account interest: May be tax-free in India but is generally taxable in the United States and must be disclosed on FBAR and Form 8938 if thresholds are met.
• Capital gains: On shares or property in India are taxed by both countries; credits depend on income categorization under each system and the treaty.
• Foreign gifts or inheritance: May not be taxed, but can be reportable to the IRS on Form 3520.

Keeping sale documents, currency conversion records, and proof of taxes paid is important for matching credits across returns.

Typical timeline that produces surprises

A common timeline explains the surprise many people face:

1. An Indian professional receives a U.S. Green Card and becomes a U.S. tax resident.
2. Years later, an OCI arrives to ease India travel and stays.
3. The family moves back to India where the person spends more than 183 days and becomes an Indian tax resident.
4. The U.S. tax status remains unchanged because the Green Card is still active.

The person now files tax returns in both countries, uses the treaty to claim credits, and manages account disclosures across jurisdictions. To end the U.S. global tax duty they must:

• File Form I-407 to surrender the Green Card, and
• File Form 8854 if income or asset thresholds require it.

Until those steps are done, the IRS treats them as a U.S. tax resident — a situation sometimes called “shadow residency”, where worldwide taxation continues even after moving back to India.

Real-world example

Ravi, an engineer, illustrates the friction:

• Green Card obtained in 2016, OCI in 2022.
• Moved to Bengaluru in 2023 to start a tech firm.
• India counts him as a resident (stays more than 182 days).
• The U.S. still counts him as a tax resident because he never surrendered the Green Card.

Both countries tax his Indian salary and investment income; he can claim credits, but he must file in both places and keep careful records. Skipping U.S. returns risks FATCA-related penalties and IRS notices, especially where undeclared accounts or PFIC holdings are involved.

Compliance checklist and recommended steps

Green Card holders should follow these compliance steps while the Green Card remains valid:

• Continue to file Form 1040 in the United States each year.
• File the Indian income tax return each year as required.
• Disclose foreign accounts if the total across accounts exceeds USD 10,000 at any point in the year (FBAR / FinCEN 114).
• Avoid or exit PFIC-type holdings (many Indian mutual funds).
• Track Indian taxes paid to support Form 1116 (U.S.) and Form 67 (India) credits so that credits align with the same items of income.
• If relocation to India is permanent:
  • Plan formal surrender of the Green Card through Form I-407.
  • Be ready to file Form 8854 if thresholds require it.
• Coordinate a U.S. CPA and an Indian CA with treaty experience to keep both returns aligned and reduce mismatch letters.

Broader trends and policy notes

India has seen a rise in professionals returning with an OCI after years in the United States. Many families value:

• Flexibility of India access
• Schooling options for children
• Business opportunities in cities like Bengaluru, Hyderabad, or Pune

But holding both statuses — Green Card and OCI — creates ongoing global tax compliance that does not fade with time. Policymakers, tax officers, and cross‑border advisors have been urging better awareness of the double tax credit process, including smoother handling of Form 67 and cross-border data exchange, so taxpayers can line up credits without delays.

For families, the practical lesson is: an OCI reconnects you with India, but a Green Card keeps you inside America’s worldwide tax regime.

Key forms and official sources

Surrendering the Green Card and managing U.S. filing obligations are outlined on official pages:

• USCIS Form I-407: surrendering the Green Card — https://www.uscis.gov/i-407
• IRS Form 1040 (annual U.S. tax return) — https://www.irs.gov/forms-pubs/about-form-1040
• FBAR (FinCEN) filing resource — https://www.fincen.gov/report-foreign-bank-and-financial-accounts
• IRS Form 8938 (FATCA asset reporting) — https://www.irs.gov/forms-pubs/about-form-8938
• IRS Form 1116 (foreign tax credit) — https://www.irs.gov/forms-pubs/about-form-1116
• IRS Form 8854 (exit tax / expatriation) — https://www.irs.gov/forms-pubs/about-form-8854

These references do not remove the need to file in India as well, but they help keep the U.S. side complete and consistent.

Final takeaway

For migrants weighing their next steps, the decision comes down to control and clarity. If long-term life is in India and U.S. ties are winding down, a planned surrender of the Green Card — and a clean final filing where required — stops ongoing U.S. worldwide taxation. Until then, the rules remain firm:

• A Green Card defines U.S. tax residence across borders.
• An OCI supports entry and life in India.
• The two statuses can co‑exist, but they require careful filings.

The tax treaty is a bridge for credits, not an exit route from annual reporting. People who match the same items of income across both returns, collect proof of Indian tax payments, and avoid PFIC traps tend to face fewer problems later.

Don’t confuse immigration convenience with tax status. An OCI lets you live and work freely in India, but the Green Card keeps you on the U.S. global tax return until you file the right forms to close it out. Documentation, aligned credits through Form 1116 and Form 67, and timely disclosures via FinCEN 114 and Form 8938 are essential protections in cross‑border life.