FEIE vs FTC for Indian H-1B and F-1 Earners with India Income

(INDIA) Indian-origin professionals on H-1B visas and F-1 students with income streams in India face a yearly choice that reaches far beyond taxes: whether to claim the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC) on their United States 🇺🇸 returns. The decision shapes tax bills, mortgage approvals, credit access, and even immigration timelines. For many, it also reduces audit exposure and protects long-term financial plans as they move between India and the United States for study, work, and family reasons.

At the core is the United States’ rule to tax worldwide income. That means Indian salary from remote work done in India, rent from a flat in Bengaluru, interest on NRE/NRO accounts, or family business dividends must be reported each year on a U.S. return, even if taxes were already paid in India. To avoid double taxation, the Internal Revenue Service allows two paths: the Foreign Earned Income Exclusion (claimed on Form 2555) and the Foreign Tax Credit (claimed on Form 1116). You cannot apply both tools to the same slice of income, and choosing wrong can quietly undercut immigration cases, mortgage options, and credit profiles for years.

Policy context: who benefits from FEIE, who benefits from FTC

The Foreign Earned Income Exclusion works best for salary earned from work physically performed outside the U.S. If you meet one of two tests, you may exclude foreign salary from U.S. tax—up to about $126,500 in 2025. The tests are:

• Physical Presence Test: outside the United States for 330 full days in any 12-month period.
• Bona Fide Residence Test: a true resident of a foreign country for a full calendar year, with a permanent home and tax ties there.

Most H-1B workers won’t qualify as bona fide residents because an H-1B visa signals intent to live and work in the United States. If they are spending extended time in India, they generally rely on the Physical Presence Test to claim the exclusion.

• Example: a professional earning $90,000 from work physically performed in India may exclude the entire amount if the 2025 limit exceeds their salary; U.S. tax due on that salary would be $0, but a U.S. return is still required with Form 1040 and Form 2555.

The Foreign Tax Credit usually fits passive income—rent, interest, dividends—but can apply to salary as well. The credit reduces U.S. tax by the foreign (Indian) tax paid on the same income, subject to IRS limits. There is no fixed income cap for the FTC itself; instead, the credit cannot exceed the portion of U.S. tax attributable to that foreign income category.

For many Indian-origin taxpayers who plan to return to the U.S., the FTC keeps income visible on the return while avoiding double taxation. According to analysis by VisaVerge.com, the practical difference often shows up in lender and immigration reviews:

• FEIE lowers U.S. taxable income and can produce an Adjusted Gross Income (AGI) near zero.
• FTC keeps reported income on the page and shows U.S. institutions that you can support a mortgage, sponsor a family member, or maintain stable finances over time.

Lender and immigration fallout when income is “invisible”

The most overlooked drawback of the FEIE is that excluded wages don’t count for many U.S. banks and some immigration reviews. Consequences include:

• Mortgage applications showing $0 AGI even when you earned well abroad, leading to loan denials or smaller approvals.
• Lower income on records needed for sponsorships, such as affidavits like I-864.
• “Low income” flags during H-1B extensions, employment-based green card progress, or naturalization steps that examine tax history.

If your goal is to build or keep a strong credit profile in the U.S.—because you plan to return for a job, apply for a green card, or buy a home—the Foreign Tax Credit tends to be safer. It shows the income but offsets the tax with the Indian tax paid.

Consider four common paths:

1. Returning to the U.S. soon: the Foreign Tax Credit keeps income visible and supports credit, lending, and immigration records.
2. Living long-term in India with salary below the FEIE cap: the Foreign Earned Income Exclusion may reduce U.S. tax to zero if you meet the 330-day rule.
3. Salary plus rent: a split strategy—use FEIE for salary up to the cap, and FTC for rent—often protects against double taxation while keeping passive income on record.
4. Only rent or interest: the Foreign Tax Credit applies; FEIE does not cover passive income.

Compliance risks: audits, penalties, and immigration delays

The IRS expects accurate reporting of foreign income and accounts. For H-1B immigrants and F-1 students, missed filings can spill over into employer reviews and immigration cases:

• IRS audit risk from mismatched or unreported income. For example, an H-1B worker collecting rent in India who reports nothing in the U.S. may face an audit when third-party data (including FATCA) reveals a gap. Employers sometimes pause H-1B extensions when compliance looks risky.
• FBAR penalties for unreported foreign accounts: if the total value of foreign accounts exceeds $10,000 at any time in the year, the FBAR (FinCEN-114) is required. Missing it can bring a non-willful penalty of up to $10,000 per year, even with no U.S. tax due.
• Tax debt and interest when foreign tax is lower than U.S. tax: if India tax on rent is lower than U.S. tax, you may owe the difference plus interest if you file late.
• Green card or citizenship delays: USCIS often requests proof of U.S. tax filings. Missing years can lead to Requests for Evidence and months of delay while you obtain transcripts.
• Lost double-tax relief: you cannot stack FEIE and FTC on the same income. Using FEIE for salary and then forgetting to claim FTC for rent can lead to double taxation on that rent, and late-filed FTC claims may be denied.

These patterns point to a simple rule: your visa and immigration record often follows your tax compliance. Clean filings now reduce trouble later.

Forms and filings you should expect

Practical steps matter. Each year, many Indian-origin filers should expect to file:

• Form 1040 (U.S. individual return)
• Form 2555 if claiming the Foreign Earned Income Exclusion
• Form 1116 if claiming the Foreign Tax Credit
• FinCEN-114 (FBAR) if foreign accounts exceed $10,000 at any point
• Form 8938 (FATCA) when foreign assets are high enough to trigger reporting
• Supporting records: Indian TDS slips, Form 26AS, rent agreements, bank statements, and day-count logs for travel

When these forms are mentioned, use only the official versions:

• Form 1040: see the IRS page for filing details and current instructions.
• Form 2555 (Foreign Earned Income Exclusion): use the official IRS Form 2555.
• Form 1116 (Foreign Tax Credit): use the official IRS Form 1116.
• FBAR (FinCEN-114): file electronically via FinCEN’s FBAR page.
• Form 8938 (FATCA): see the IRS Form 8938.
• For FEIE policy guidance, see the IRS overview at Foreign Earned Income Exclusion page.

Real-world examples that illustrate risk

• A renter in India with ₹25 lakhs in annual rent who fails to report U.S. income may get flagged through FATCA data; the IRS then seeks records, and the employer reevaluates the worker’s extension.
• A student with ₹15 lakhs in an NRE account that crosses $10,000 during the year skips the FBAR and faces a non-willful penalty notice.
• A family sponsor applying for a marriage-based green card runs into a one-year delay when USCIS sees two missing tax years on IRS transcripts.

Each of these events creates stress that often exceeds any tax savings from a quick, poorly chosen filing method.

Practical decision rules and an annual checklist

To keep things simple during decision season, use these guidelines:

• If your salary earned in India for the year is below the FEIE cap, and you meet the 330-day rule, FEIE can reduce U.S. tax to zero.
• If you earn rent, interest, or dividends from India, plan for the FTC to prevent double taxation and to keep income visible on your U.S. return.
• If you expect a move back to the United States, prefer the FTC to preserve a strong AGI for lending and immigration reviews.
• If your income is mixed—salary and rent—use FEIE for salary up to the cap and FTC for passive income. Don’t attempt to apply FEIE and FTC to the same income.

Yearly checklist:

• Always file a Form 1040, even if U.S. tax owed is zero.
• Add Form 2555 for FEIE or Form 1116 for FTC, depending on your mix of income.
• File the FBAR if your foreign accounts ever exceed $10,000 in the year.
• File Form 8938 if your foreign assets cross FATCA thresholds.
• Keep Indian records—TDS, Form 26AS, rent agreements, and day-count logs—to support your claims.

Important takeaway: align the tax tool with your life plan. Stay abroad long-term with modest salary from work in India? FEIE may be the cleanest fit. Planning to return to the United States for career or family, or need strong financial proof for a mortgage or sponsorship? The Foreign Tax Credit often does more to protect your future. Mixed income streams usually call for a split approach. And regardless of tax owed, filing on time and completely is the steady path to fewer audits, fewer penalties, and smoother immigration and financial outcomes.