India–U.S. Tax Reporting: Avoiding Double Taxation and Documentation

Indian professionals in the United States are sharpening their focus on India‑U.S. reporting as tax season brings a familiar risk back to the surface: double taxation on the same income earned across borders. Accountants and cross‑border filers say the pressure points look similar year after year—mismatched calendars, unclear residency status, and documentation errors that snowball into denied foreign tax credits and potential penalties. The concerns cut across visa categories, affecting students on F‑1 visas moving into Optional Practical Training, H‑1B and L‑1 workers with equity pay, and new Green Card holders who suddenly fall under worldwide tax rules in both countries.

Why overlap happens: residency rules and different calendars

The problem is not that either country taxes unfairly on its own, tax practitioners say, but that the two systems overlap in ways that can catch even careful filers.

• India uses a day‑count rule to determine tax residency.
• United States relies on the Green Card test or the Substantial Presence Test (counts days over a three‑year window).

In a relocation year or when someone lives midway between countries, it’s easier than people expect to meet both tests. The Double Taxation Avoidance Agreement exists to address this, but treaty relief depends on reporting income in the right place, at the right time, with the right proofs.

A further complication: the countries run on different clocks.

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

Earnings split across those periods (salary, bank interest, dividends, property sales) can mean tax paid in India in one period does not align with the U.S. reporting year, creating a mismatch that can disallow foreign tax credits—especially when currency conversion is unclear.

How foreign tax credits are claimed (and how they fail)

The framework for relief is straightforward on paper: residents generally pay tax on worldwide income, and the treaty allows a foreign tax credit in one country for tax paid in the other.

Key procedural rules and forms:
– India: foreign tax credit governed by Rule 128; requires Form 67 with proof of tax paid abroad.
– United States: claim foreign tax credit using Form 1116.

Common practical failures:
– Using the wrong exchange rate so numbers don’t reconcile.
– Recognizing a capital gain in India but reporting it in the U.S. later.
– Claiming credit for tax paid on a different category of income than what is reported in the U.S.

If categories, years, or amounts don’t match exactly, the credit can be denied.

Typical flashpoints and required documentation

1. Salary across a move
   • Example: worked in India April–July, relocated to U.S. in August.
   • Each system requires a day‑by‑day breakdown and clarity on where work was performed and which employer paid which portion.
   • Treaty allows apportionment but demands detailed records.
2. Equity pay (RSUs, ESPP)
   • Vesting may occur in one country and sale in another; the two systems can treat the same shares in different years or as different income categories.
   • Required documents: vesting schedules, brokerage statements, tax withholding records.
3. Financial assets and interest
   • Interest on Indian savings/fixed deposits is taxable in India and must be reported on a U.S. return by U.S. tax residents.
   • FBAR (FinCEN Form 114) filing is required if foreign accounts exceed USD 10,000 at any point in the year; penalties for non‑willful failure start at USD 10,000.
   • U.S. residents may also need to file Form 8938 depending on thresholds.
4. Indian paper trail
   • Form 16 (employer), Form 26AS (tax deducted at source) anchor Indian returns.
   • These forms become evidence for foreign tax credit claims in the U.S.; mismatches invite IRS follow‑up.

Residency rules and the treaty “tiebreaker”

• India: resident if at least 182 days in the financial year (with other multi‑year provisions).
• U.S.: resident if Green Card holder or meeting the Substantial Presence Test (current year days + weighted prior years).

If someone meets both countries’ residency tests, the treaty’s tiebreaker considers:
– where the person has a permanent home,
– where personal/economic ties are stronger,
– and, if needed, nationality.

This does not change immigration status but can determine which country’s resident‑based tax claim has priority for that year.

Practical checklist for filers (records and proof)

Practitioners emphasize a records checklist to support any residency or credit position:

• Stock grant agreements, vesting confirmations, and sale contracts.
• Indian tax payment challans and acknowledgments for Form 67.
• W‑2s, Form 1040s, and Schedule K‑1s (as applicable).
• Bank certificates, summary statements, broker statements.
• A month‑by‑month list showing which months fall in which tax year, and the exchange rates used for each conversion.

A filer who maintains this level of documentation is far better placed to secure a lasting foreign tax credit.

Capital gains and exchange‑rate pitfalls

Capital gains create acute timing issues:

• India taxes gains using cost inflation index and holding‑period rules, issuing a receipt for tax paid.
• The U.S. requires sale details converted into dollars and may apply different basis/holding‑period treatments.
• The treaty doesn’t eliminate the gain, but allows the U.S. return to claim a credit for Indian tax paid on the same gain.
• Problems arise when the filer uses an inconsistent exchange rate or reports the sale in different years across systems.

Stock‑based pay complications

• Employers often withhold U.S. tax when RSUs vest—even if the worker later moves to India and sells there.
• Trying to claim a credit in India for U.S. tax already paid requires proof of which portion was taxed when and where.
• Missing vesting schedules, withholding records, or misread broker statements can lead to denied credits and duplicate taxation.

Foreign asset disclosure traps

• India: residents must file Schedule FA to disclose foreign assets—even if those assets produced no income that year.
• U.S.: FBAR (FinCEN Form 114) and possibly Form 8938 as part of U.S. filings.

Common misunderstanding: filers sometimes omit these because they believe “no income = nothing to file.” The rules require disclosure regardless, and penalties can accumulate quickly.

Filing mechanics and common denial reasons

• India: Form 67 is required to claim foreign tax credit—submit on time with the return.
• U.S.: Form 1116 is the parallel mechanism; the IRS expects supporting proof of foreign tax paid.

Common denial triggers:
– Claiming a credit for tax paid in a different year than the income reported.
– Unsupported exchange rates.
– Mixing income categories (e.g., putting salary taxes into the “passive” income basket).

Denials increase tax due and invite future scrutiny.

Employer support and planning strategies

Some employers offer tax equalization or shadow payroll to smooth tax exposure during mid‑year moves. These programs can:

• Align withholding in one country with expected liability in another.
• Keep paperwork consistent for future credit claims.

Where employer programs aren’t available, the same principle holds: plan ahead for how salary, bonuses, equity, bank interest, and rental income will be taxed in both systems, and preserve the paperwork that proves it.

Rules of thumb practitioners give

Three basics often repeated by cross‑border preparers:

1. Decide residency each year and document the decision—especially when dual residency is possible.
2. Claim credits correctly: match the exact income and year; attach proof of foreign tax paid.
3. Keep consistent records: salary forms from both countries, foreign tax receipts, broker statements, sale deeds, and a record of exchange rates used.

These common‑sense steps are often decisive in audits and reviews.

“Avoiding double taxation between India and the U.S. isn’t about paying less — it’s about paying right.”

This sums up the approach: alignment of residency determinations, synchronized timelines, and a solid documentation trail.

Practical pointers and official resources

• U.S. residents claiming credits for Indian tax paid on interest or dividends can file Form 1116: https://www.irs.gov/forms-pubs/about-form-1116
• U.S. taxpayers with foreign financial assets may also need Form 8938: https://www.irs.gov/forms-pubs/about-form-8938
• FBAR filing guidance: https://www.fincen.gov/report-foreign-bank-and-financial-accounts
• India: foreign tax credit via Form 67 (official help): https://www.incometax.gov.in/iec/foportal/help/returns/form-67
• U.S. Substantial Presence Test guidance: https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

Residency determinations and their consequences can be reviewed with local professionals when travel history is complex. The treaty’s tiebreaker rules apply only after the facts—home, family, job, bank accounts—are documented.

Small details matter

• Use consistent name formats (preferably matching the passport) across Indian and U.S. filings to make it easier for auditors to match records.
• Keep digital copies of returns, confirmations, and proofs for at least seven years. Cloud folders, redundant backups, and clear file names help resolve notices efficiently.

Policy and outreach implications

As India’s diaspora grows and more people cross into U.S. tax residency, calls to simplify foreign tax credit procedures—particularly around Form 67—and to expand outreach about the treaty are practical measures that could reduce disputes. Clearer guidance on FBAR and Form 8938 thresholds also helps prevent accidental non‑filing by new U.S. residents.

Bottom line

• Double taxation is most likely when residency is muddled, timelines aren’t synced, and evidence is thin.
• Double taxation is least likely when residency is determined carefully each year, credits are claimed for the same income in the same year with proof attached, and the paper trail is clean and consistent.

For the many Indians in the United States—students, temporary workers, or permanent residents—the practical takeaway is the same: get the basics right, keep documents in order, and align both systems so each recognizes what the other has already taxed.