Rental Income Tax for H-1B/GC with Indian Property: Dual Filing

Millions of Indian families count on rent from homes back in India to help cover loans, support parents, or keep a foothold for future returns. For Indian‑origin workers in the United States 🇺🇸—especially H‑1B professionals and Green Card holders—that same rental income also triggers tax rules in two countries. The core facts are straightforward but easy to miss: rent from property located in India is always taxed in India, and U.S. tax residents must also report that rental income on their U.S. returns. The India–U.S. tax treaty can prevent double taxation, but only if you file the right forms and keep proof of taxes paid.

According to analysis by VisaVerge.com, missed reporting on Indian rental income is one of the most common problems seen among H‑1B workers and new permanent residents, and it often surfaces during audits or immigration background checks.

Basic sourcing and reporting rules

• India treats rental income from a house, apartment, or commercial unit located in India as India‑sourced income, regardless of the owner’s residence.
• If your total income crosses the basic exemption limit in India, you must file an Indian tax return and pay any tax due on the rent after deductions.
• The United States taxes worldwide income for U.S. citizens, Green Card holders, and U.S. tax residents such as many H‑1B workers. That includes rental income from India — even if the money stays in an Indian bank account and never moves to the U.S.

The property location does not change the U.S. reporting duty. Many H‑1B professionals assume that paying tax in India ends the story — it does not.

Foreign Tax Credit vs. U.S. reporting

• The U.S. allows a Foreign Tax Credit to reduce U.S. tax for taxes already paid in India.
• You must first report the rental income on your U.S. return, compute the U.S. tax, and then apply the credit.
• If Indian tax > U.S. tax, your U.S. tax on that rental income can be zero, and you may be able to carry forward the extra credit.
• If U.S. tax > Indian tax, you pay the difference.
• Important: The Foreign Earned Income Exclusion does not apply to rental income — rent is passive income, not earned wages.

Key Indian deductions and withholding

India provides a predictable set of deductions that reduce the taxable rent:

• 30% standard deduction on net annual value (gross rent minus property tax), irrespective of actual expenses.
• Home loan interest (subject to limits).
• Property tax paid.
• Repairs and maintenance in some cases.

TDS (Tax Deducted at Source)

• If a tenant is required to deduct tax at source, TDS is taken from rent and deposited with Indian tax authorities.
• Common practice: when rent exceeds ₹50,000 per month, the tenant generally withholds 30% (plus surcharge and cess) and issues a TDS certificate.
• Owners should keep the TDS certificate (often Form 16A) and Form 26AS to confirm the tax deposit — these documents support U.S. Foreign Tax Credit claims.

U.S. forms and reporting requirements

U.S. reporting for rental income is paperwork‑heavy. Common forms include:

• Form 1040 — report total income, including rent from India. See About Form 1040: https://www.irs.gov/forms-pubs/about-form-1040
• Schedule E (Form 1040) — report rental income and expenses (mortgage interest, repairs, insurance, management fees, property tax). See About Schedule E (Form 1040): https://www.irs.gov/forms-pubs/about-schedule-e-form-1040
• Form 1116 — claim the Foreign Tax Credit for Indian tax paid. See About Form 1116: https://www.irs.gov/forms-pubs/about-form-1116

Foreign account and asset reporting:

• FBAR (FinCEN Form 114) — required if aggregate foreign account balance (NRE/NRO, etc.) exceeded $10,000 at any time during the year. See: https://www.fincen.gov/report-foreign-bank-and-financial-accounts
• Form 8938 (FATCA) — file if specified foreign financial assets exceed thresholds. See About Form 8938: https://www.irs.gov/forms-pubs/about-form-8938
• Form 8621 — may apply for Indian mutual funds or REITs treated as Passive Foreign Investment Companies (PFICs). See About Form 8621: https://www.irs.gov/forms-pubs/about-form-8621

Practical note: one Indian apartment rented to a relative can lead to five or more U.S. forms if your bank balances and investments cross reporting lines.

Depreciation: a crucial difference

• India does not allow depreciation for individuals on rental property the way the IRS does.
• The IRS requires depreciation of the building (not land) each year on the U.S. return, which reduces current U.S. taxable income.
• On sale, the U.S. will recapture depreciation and tax it, even if the property appreciated overall.
• Not claiming depreciation does not avoid recapture — it simply means you paid more tax during ownership.
• Seasoned preparers emphasize a documented allocation between land and building for U.S. depreciation schedules.

Example: how the Foreign Tax Credit works

• If you paid $1,800 tax in India on the rental income and your U.S. tax on that same income is $2,400, then after claiming the credit on Form 1116, your U.S. tax owed is $600.
• If Indian tax > U.S. tax, U.S. tax on that income is zero and you can often carry forward the excess credit.
• The credit depends on careful currency conversion:
  • Use a consistent annual average rate for income conversion.
  • Use an appropriate rate for the date Indian tax was paid when computing the credit.
  • Mixing rates can create mismatches and risk IRS denial of part of the credit.

Common mistakes and pitfalls

• Ignoring small rent amounts in India because they seem “too small to matter.”
• Claiming the Foreign Earned Income Exclusion for rental income (not allowed).
• Forgetting FBAR and FATCA filings for Indian accounts — can lead to large fines.
• Failing to keep Indian Form 26AS, TDS certificates, and the Indian return as proof of tax paid.
• Not tracking depreciation for U.S. purposes, producing higher tax now and surprise recapture later.
• Inconsistent exchange rate methodology causing credit mismatches.

“One missed form or missing proof can turn a straightforward rental into a multi‑year headache with penalties, interest, and immigration friction.”

Two real‑life cases

Case one — compliant path:
– A software engineer on H‑1B in California rents an inherited flat in Pune to support parents.
– Files in India claiming the 30% standard deduction, claims mortgage interest and keeps the TDS certificate.
– In the U.S., reports rent on Schedule E, claims depreciation, and files Form 1116 with Indian tax records.
– Indian tax > U.S. tax, so the foreign credit eliminates U.S. tax on the rent and creates a small carryforward.

Case two — missed steps:
– A new Green Card holder in Texas rents a Delhi apartment to a cousin with no formal lease, no TDS, and no Indian return.
– Keeps funds in an NRO account that crossed $10,000 during the year, fails FBAR, and does not report the rent.
– Later, when applying for a mortgage, IRS transcripts reveal corrected returns, added income, penalties, and delays; the borrower pays more tax and fees than if he had filed correctly from the start.

Immigration and enforcement implications

• Tax compliance matters at immigration milestones. Rental income taxed in India but not reported in the U.S. can raise questions for Green Card applicants, adjustment‑of‑status filers, or naturalization applicants.
• Tax errors can be fixed with amended returns, but clean records from the start make life much easier.
• Data sharing is increasing. Indian bank data and tax records flow more readily to foreign tax agencies, and the IRS is expanding cross‑border checks.

Practical compliance steps (step‑by‑step)

1. File in India if required:
   • Report rental income, claim 30% standard deduction, include loan interest and property tax, pay tax, keep TDS certificate, and confirm entries in Form 26AS.
2. Report rent in the U.S.:
   • Include rent on Form 1040, complete Schedule E, claim depreciation, and prepare Form 1116 for the Foreign Tax Credit.
3. Handle foreign account reports:
   • File FBAR if foreign accounts exceeded $10,000 aggregate.
   • File Form 8938 if FATCA thresholds are met.
4. Watch exchange rates and proof:
   • Use consistent currency conversions and keep proof of Indian tax paid.
5. Monitor PFIC rules:
   • Indian mutual funds or REITs may require Form 8621 annually.
6. Document property costs:
   • Keep purchase deed, stamp duty records, and improvement costs for depreciation and capital gains.
7. Plan for sale and repatriation:
   • Understand U.S. depreciation recapture and Indian capital gains tax; good records prevent surprises.

Risks of non‑compliance

• IRS penalties and interest for unreported income or late filings.
• High fines for missed FBAR/FATCA — penalties can start at $10,000 per violation.
• Foreign Tax Credit denied if you lack proof (TDS, Form 26AS, Indian return).
• Immigration friction during background checks or adjustments of status.
• Higher lifetime tax if depreciation is skipped, due to future recapture.

Recordkeeping and currency conversion guidance

• Keep a clear audit trail: lease agreements, Indian tax returns, TDS certificates, Form 26AS, and bank statements.
• Use a consistent method for currency conversion:
  • Common practice: use yearly average exchange rate for income on Schedule E, and use the spot rate on the tax payment date for Form 1116.
  • Document and save the exchange rate sources you used.

Year‑end checklist

• Confirm rent received and property taxes paid in India; download Form 26AS and collect TDS certificates.
• Review whether Indian rent + other income cross India’s basic exemption limit; prepare Indian return if required.
• Update U.S. depreciation schedule and record repairs/insurance costs.
• Check NRE/NRO balances for FBAR (any day > $10,000).
• Review foreign financial assets for Form 8938 thresholds and Form 8621 requirements.
• Set your exchange rate method for the year and apply it consistently across U.S. filings.

Helpful official links

• Form 1040: https://www.irs.gov/forms-pubs/about-form-1040
• Schedule E (Form 1040): https://www.irs.gov/forms-pubs/about-schedule-e-form-1040
• Form 1116: https://www.irs.gov/forms-pubs/about-form-1116
• FBAR (FinCEN Form 114): https://www.fincen.gov/report-foreign-bank-and-financial-accounts
• Form 8938: https://www.irs.gov/forms-pubs/about-form-8938
• Form 8621: https://www.irs.gov/forms-pubs/about-form-8621
• Indian Income Tax Department e‑filing portal: https://www.incometaxindia.gov.in/

Final takeaways

Rental income from India can be a steady pillar for H‑1B and Green Card households in the U.S., supporting family needs and preserving long‑term assets. The price of that benefit is cross‑border paperwork:

• File in India when required and keep TDS/Form 26AS proof.
• Report the rent on Form 1040 and Schedule E, claim depreciation, and use Form 1116 to claim the Foreign Tax Credit.
• Watch FBAR and FATCA thresholds, and track PFIC rules for Indian funds.
• Keep consistent exchange‑rate documentation and thorough records.

In a period of tighter enforcement and enhanced data sharing, clean and complete filings are the surest way to protect your home in India — and the home you are building in the United States.