India–U.S. Tax Reporting: A Practical Guide to Avoid Double Taxation

(UNITED STATES) As tax filing windows open in both countries, Indian nationals living, working, or studying in the United States 🇺🇸 are being urged to tighten India–U.S. reporting and documentation to avoid double taxation and costly penalties.

Cross-border income—salaries, RSUs, dividends, rent, or interest—often sits in two systems at once. When filings don’t line up, credits can be denied and audits can follow. The India–U.S. Double Taxation Avoidance Agreement (DTAA) is meant to prevent the same income from being taxed twice, but it works only if people file in both countries, match the same income items across returns, and keep proof in order.

According to analysis by VisaVerge.com, the pressure is highest on those who change residency during a year or hold investments on both sides, a pattern that has become common for the globally mobile professional.

Why dual reporting becomes a problem

Both countries tax based on residency and source, creating overlap:

• India: Treats those who spend 182 days or more in a financial year as residents and taxes their global income.
• United States: Taxes worldwide income if someone holds a Green Card or meets the Substantial Presence Test, which uses a 183‑day formula across a three‑year lookback.

A person can be a tax resident of both countries in the same year. The DTAA then applies tiebreaker rules based on where one has a permanent home and the center of vital interests. That decision depends on facts and paperwork; if it’s wrong or poorly supported, both tax authorities may assert claims.

Timing mismatches: India vs U.S. tax years

Timing adds a second layer of difficulty:

• India’s tax year: April–March
• U.S. tax year: January–December

Income may fall in one year in India but a different year in the U.S. Without careful alignment, taxpayers can claim credit for the wrong year and see a denial. This is common with RSUs and bonuses where grant, vest, and sale dates straddle a move or a change in residency status. When timing is off by even a few weeks, the same stock income may be taxed twice unless the taxpayer can show which portion belongs to which period.

How DTAA relief typically works

The DTAA’s relief comes mainly through foreign tax credits:

• In India, residents can claim a foreign tax credit under Rule 128, but they must submit Form 67 before filing the return and attach proof of taxes paid abroad.
• In the United States, residents can claim foreign tax credits on Form 1116, which reduces U.S. tax on income already taxed in India.

Experts stress credits work only when the same income stream is reported in both countries and the numbers match after currency conversion. If figures or descriptions differ, or conversion rates are inconsistent, claims can be questioned.

Common trouble spots and practical fixes

Major overlap areas include salaries, investment income, and capital gains.

Salaries
– When someone works part of a year in India and part in the U.S., both systems may try to tax the annual salary.
– Practical fix: apportion salary by days worked in each country, report those amounts in both places, and then use the DTAA to credit tax paid abroad.

Interest and dividends
– Interest/dividends from Indian deposits or mutual funds are taxable in India, but U.S. residents must also include them on U.S. returns.
– Disclosures commonly involve:
– Form 8938 for specified foreign financial assets
– FBAR (FinCEN Form 114) when foreign account balances cross the threshold: https://www.fincen.gov/report-foreign-bank-and-financial-accounts
– If taxes are paid in India on that interest, U.S. residents can seek credit via Form 1116, but only if records clearly tie the income and tax to the same period.

Capital gains
– Selling Indian property or shares while resident in the U.S. can create taxable gains in both jurisdictions.
– Authorities look for sale deed, purchase cost, and Indian tax receipts to confirm credit claims.
– Stock compensation (RSUs, options) is particularly complex when vesting and sale straddle residency changes. Taxpayers must split wage income from capital gain and map each piece to the correct year and country.

Without precise documentation, credits can be reduced or denied, leaving the taxpayer exposed to excess tax.

Required documents and reporting checklist

Gather and match documents across jurisdictions:

• Indian documents:
  • Form 16 (salary withholding)
  • Form 26AS (tax credit statement)
  • Form 67 (for claiming foreign tax credit) — instructions: https://www.incometax.gov.in/iec/foportal/help/how-to-file-form-67
• U.S. documents:
  • W‑2 wage statements
  • Form 1040 return
  • Form 1116 (foreign tax credit): https://www.irs.gov/forms-pubs/about-form-1116
  • Form 8938 (specified foreign assets): https://www.irs.gov/forms-pubs/about-form-8938
  • FBAR / FinCEN Form 114 (filed with FinCEN): https://www.fincen.gov/report-foreign-bank-and-financial-accounts

Important thresholds and deadlines:
– FBAR threshold: USD 10,000 aggregate highest balance across all foreign accounts.
– Missing FBAR or leaving out foreign asset details can lead to heavy penalties. Mismatches between Indian Form 26AS totals and U.S. disclosures can raise IRS scrutiny.

Currency conversion: avoid inconsistent methods

Currency conversion is critical and often causes disputes:

• Income in INR must be converted to USD for U.S. filing, and vice versa for claiming credits in India.
• Authorities expect a consistent and supportable exchange-rate method.
• Common mistakes:
  • Using different rates across forms
  • Mixing spot rates with annual averages without documentation
• Recommendation: Keep copies of exchange‑rate sources alongside pay slips, bank certificates, and brokerage statements so the math can be reproduced later.

Foreign asset disclosure rules

Rules extend beyond income to asset reporting:

• Indian residents must disclose foreign assets in Schedule FA of the Indian return, even if no income was produced.
• FBAR rules (U.S.) are based on the highest aggregate foreign account balance, not taxable income.
• People who move mid‑year may forget to count old salary accounts or joint family deposits and inadvertently cross the FBAR threshold.
• FBAR is filed with FinCEN (see link above) and failures can trigger federal penalties even though it’s separate from tax returns.

Practical year‑end/tax‑planning steps

To reduce risk and friction, follow these steps each year:

1. Confirm residency status in both India and the U.S. for the year.
2. If both countries treat you as resident, be ready to apply DTAA tiebreakers and retain proof of home, family ties, and economic interests.
3. Tie each income stream to the right country and period, then claim credits for taxes paid abroad.
4. Align timeline differences (India’s April–March vs U.S. January–December).
5. File asset and account reports on time, including FBAR and Form 8938 if thresholds are met.
6. Keep digital copies of all filings and supporting documents for seven years (pay slips, conversion notes, tax receipts).

The IRS provides international taxpayer guidance and the official forms linked above serve as starting points.

“The aim of the DTAA is not to cut taxes, but to make sure people pay the right amount once.”

Common mistakes to avoid

• Claiming a credit in one country for income taxed in the other year.
• Using different INR–USD rates across filings.
• Forgetting Indian capital gains from foreign stock options or small dividends from mutual funds.
• Missing FBAR because the combined account balance exceeded the threshold for only a few days.

Each slip can create overpayment, penalties, or audit inquiries. Corrections often take months and more paperwork than the original filing.

Employer role and professional help

Employers can reduce headaches by implementing tax equalization or shadow payrolls to keep withholdings aligned in both countries.

• When employer systems are present, gaps in proof shrink and claiming credits becomes easier.
• When absent, taxpayers must maintain even tighter records: matching names to passports across returns and keeping long-term archives.

Many taxpayers seek a dual‑qualified India–U.S. CA or CPA to do a final review and ensure numbers line up across forms before filing.

Bottom line

For Indians in the U.S. on F‑1, H‑1B, L‑1, or Green Cards, or those who returned to India while holding U.S. stock or rental income, the safest path is steady discipline:

• Correct residency determinations
• Matched income reporting across both countries
• Well‑supported foreign tax credits
• Timely asset and account reporting

When done well, double taxation is avoided and filings pass quietly. When done poorly, the same income can be taxed twice, credits are denied, and audits become more likely. VisaVerge.com reports that planning before a move—especially for RSUs, savings accounts, and rental income—saves time and money when filing on both sides.