Returning Indian professionals with years of experience in the United States under the H-1B visa are preparing for a tax season shaped by cross-border rules and timing decisions that can affect how much they owe on both sides of the world.
As the financial year closes in India and the U.S. filing calendar advances, attorneys and tax planners say the most pressing question is whether a person’s tax status counts as resident in one country, both, or neither for different parts of the year — and what that means for paychecks, stock vesting, investment income, and ongoing ties to American employers. For thousands of workers who moved home this year or plan to split time between India and the United States, the answer lies in the details of how each system measures residence and the calendar of days spent in each country. Those details are now driving high-stakes decisions on flight dates, project timelines, and when to close out U.S. payroll.
U.S. test for residency: the Substantial Presence Test
At the center of the discussion is the Substantial Presence Test, the U.S. metric that counts days in-country over a three-year window to decide whether a foreign national is a tax resident. H-1B visa holders who cross the threshold usually become resident aliens for U.S. tax purposes, which triggers reporting of worldwide income during the period they are considered residents.
Key points:
– Visa category alone does not determine tax status — the day count does.
– Wages earned in India, foreign interest, and other non-U.S. income may need to be reported on a U.S. return for the resident portion of the year.
– The IRS explains the thresholds and counting formula at its Substantial Presence Test guidance: https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test.
People who moved to India early in the year may avoid hitting the threshold; those who stayed longer to finish projects or wait for a school year to end might still be U.S. residents for part of the tax year.
Dual-status returns and filing mechanics
Those who split their year between India and the United States often file a dual-status return, where part of the year is resident and part is nonresident. The mechanics can be technical and require careful documentation.
Typical filing steps:
1. File Form 1040 for the resident portion of the year and attach the required statement.
2. Report the nonresident period on Form 1040-NR.
3. Write “Dual-Status Return” across the top of the filing as the IRS instructs.
Useful IRS guidance:
– About Form 1040: https://www.irs.gov/forms-pubs/about-form-1040
– About Form 1040-NR: https://www.irs.gov/forms-pubs/about-form-1040-nr
How income is split between resident and nonresident periods can change whether foreign wages and overseas investment income are included, and it affects eligibility for credits and deductions. For example, RSUs that vest while a person is a U.S. resident are typically taxed by the U.S., whereas similar income later in the year might fall outside U.S. jurisdiction if the taxpayer is nonresident at that time.
Foreign asset reporting for U.S. residents
If U.S. residency applies at any point in the year, additional reporting obligations often follow.
Required filings may include:
– FBAR (FinCEN Form 114) — Report of Foreign Bank and Financial Accounts, filed through the U.S. Treasury system. See FinCEN resources at https://www.fincen.gov/fbars.
– Form 8938 (FATCA) — IRS form for specified foreign financial assets exceeding threshold amounts. Guidance: https://www.irs.gov/forms-pubs/about-form-8938.
H-1B holders who return to India and open local accounts, move investments, or keep longstanding Indian accounts may need to file these while they remain U.S. tax residents. The compliance burden often coincides with relocation, school admissions, and job transitions, increasing stress and the risk of missed deadlines.
Indian residency categories and RNOR relief
India classifies individuals as resident, non-resident, or resident but not ordinarily resident (RNOR) based on days spent in India in the current and prior years.
Implications:
– Resident: Often taxed on worldwide income.
– Non-resident: Taxed only on Indian-source income.
– RNOR: A transitional category that can exclude certain foreign income from Indian taxation for a limited period.
Many returnees value RNOR because it gives breathing room to settle back, unwind U.S. positions, or maintain U.S. consulting or investment income temporarily.
Double residency, treaty tie-breakers, and the U.S. saving clause
Both countries can claim residency in the same calendar year, sometimes simultaneously if day counts overlap. This raises the risk of double taxation and forces planning around:
- Flight dates and project timelines
- Timing of payouts (bonuses, vesting)
- When to end or start contracts
When overlap occurs, the U.S.–India tax treaty contains tie-breaker rules to designate a single country of residence for treaty purposes, which influences which country has primary taxing rights and the availability of credits.
Important caveat:
– The U.S. “saving clause” permits the United States to tax its citizens and residents even if the treaty suggests relief. For non-citizen H-1B holders, the saving clause is generally less relevant, but it should still be checked against the facts of the year.
Practical example and recordkeeping advice
Scenario:
– A software engineer leaves the U.S. in March after working January–February.
– If she meets the Substantial Presence Test, RSUs that vest in February are typically U.S.-taxable.
– If she later meets India’s residency test, India may also claim tax rights on the same income.
Advisors recommend:
– Keep a daily log of physical presence in each country.
– Maintain a calendar of vesting and bonus dates.
– Collect proof of withholding in both countries.
– Obtain written employer confirmations of payout and vesting dates when facts are close to thresholds.
These documents—dated travel confirmations, boarding passes, payroll slips, vesting notices, brokerage statements, and withholding proof—help support allocation of income between resident and nonresident periods and claims for credits.
Income timing strategies and practical limits
Returnees who retain U.S. income ties often attempt to shift income events to reduce overlap. Common approaches include:
– Schedule bonuses before departure.
– Defer signing payments.
– Time sales/invoices for periods of nonresidency.
Limitations:
– Employer policies, market conditions, and visa/immigration timelines often constrain timing flexibility.
– Stock vesting schedules or plan rules may offer little room for change.
State tax considerations in the United States
Beyond federal rules, state tax exposure can persist based on ties such as:
– A home
– A driver’s license
– Remaining payroll from a U.S. employer
– Voter registration
Steps to reduce state exposure can include final pay cycles, lease terminations, and changing registrations; these are often handled while wrapping up immigration and employment matters.
RNOR as a transitional tool
India’s RNOR status can:
– Exclude certain foreign income (e.g., rent from a U.S. home, interest from U.S. bank accounts) from Indian taxation for a limited time.
– Provide flexibility to sell or keep U.S. assets and move investments gradually.
But RNOR does not affect U.S. residency rules; if an individual meets the U.S. Substantial Presence Test in the same year, U.S. obligations remain.
Documentary requirements and treaty claims
When claiming treaty benefits, officials in both countries typically require proof of residence status, such as a Tax Residency Certificate. Dual-status filers also need to understand how to prepare statements and report nonresident period income.
Filing responsibilities:
– Full-year nonresidents with U.S.-source income may need Form 1040-NR (e.g., dividends subject to withholding, U.S. rental income).
– In India, nonresidents with Indian-source income (e.g., rent, business income) usually must file Indian returns.
Timing and planning: start months ahead
Advisors say planning months before departure yields the best outcomes:
– Align travel with bonus/vesting schedules where possible.
– Control consulting invoices and service dates to fall in favorable residency periods.
– Consider school transitions and family logistics when choosing move dates (some prefer late-December moves to enhance RNOR prospects).
Common strategies:
– Leave as early as January to avoid growing the U.S. day count.
– Favor late-December moves to shorten the first year in India and make RNOR more likely.
– Track future short business trips that could increase U.S. day counts in subsequent years.
Longer-term concerns: retirement, businesses, and equity
Returnees face ongoing questions:
– How U.S. retirement savings and future distributions will be taxed in later years.
– Treatment of K-1 income or capital gains from U.S. startups once classified as Indian residents.
– Caregiving and family logistics that intersect with tax and residency choices.
For many, the goal is not complete tax elimination but ensuring income is taxed once, in the appropriate country, with credits applied to avoid double taxation.
After the first year: compliance often simplifies
After the move:
– Those who no longer meet the Substantial Presence Test typically file as U.S. nonresidents only if they have U.S.-source income.
– FBAR and Form 8938 filings usually fall away once U.S. residency ends, reducing compliance burden.
– RNOR eventually expires; long-term residents normally become full Indian residents for tax purposes.
Green card holders face different rules and may remain U.S. tax residents until they formally end that status.
Filing checklist as filing season approaches
For those who were U.S. residents for any part of the year:
– Assemble Form 1040 package and attach the dual-status statement if required.
– Add Form 8938 if asset thresholds are met.
– Submit FinCEN 114 (FBAR) by the Treasury deadline if thresholds are crossed.
For those who were nonresidents for part or all of the year:
– Report U.S.-source income on Form 1040-NR.
– Apply appropriate withholding and treaty rates to dividends, interest, and rent.
– In India, residents report global income; nonresidents report Indian-source income only.
– When treaty benefits apply, gather a Tax Residency Certificate and supporting documentation.
Policy and future trends
Advisors note that clearer guidance on dual-residence issues and easier access to residency certificates would help returnees avoid surprise tax bills. India’s RNOR rules act as a practical bridge and can make India a more appealing base for global work. On the U.S. side, clearer dual-status instructions and employer communication about payout timing would reduce confusion for departing staff.
Key takeaways (practical checklist)
- Track days: Maintain a daily presence log for both countries.
- Document income events: Keep vesting notices, bonus dates, payroll slips, and brokerage statements.
- Plan timing: Consider moving income events into nonresident periods when feasible.
- File correctly: Know when to use Form 1040, Form 1040-NR, Form 8938, and FinCEN 114.
- Use the treaty: Consider tie-breaker rules if both countries claim residency, and collect a Tax Residency Certificate when needed.
- Start early: Begin planning months before departure to coordinate travel, payroll, and employer communications.
“Timing, rather than complexity for its own sake, holds the key.” A well-timed return flight, a rescheduled vest date agreed with an employer, or a consulting invoice moved to a later month can change the tax result more than people expect.
For H-1B visa holders returning to India, the advice is consistent: set the timeline, track the days, know which return to file, gather supporting documents, and use treaty protections when both systems claim residency. With planning and records, it is possible to move home without leaving compliance to chance.
This Article in a Nutshell
H-1B returnees must navigate U.S. and Indian residency tests that determine tax obligations. The U.S. Substantial Presence Test can trigger resident-alien status and worldwide reporting, while India’s resident, nonresident, and RNOR categories determine Indian tax exposure. Dual-status returns split the year between resident and nonresident periods using Forms 1040 and 1040-NR. Additional U.S. reporting (FBAR, Form 8938) may apply. Practical advice: track days, document vesting/payouts, plan move timing, and use treaty tie-breakers or RNOR relief where applicable.
