Understanding U.S. Expatriation Tax for Green Card Surrender in India

(INDIA) Thousands of Indian-origin families in the United States 🇺🇸 who are moving home and giving up long-held status face a tax rule that can upend years of savings in one stroke. The U.S. Expatriation Tax under IRC §877A can apply when a person surrenders a Green Card or renounces citizenship, and the law is especially tough on anyone classified as a “Covered Expatriate.” For India-based returnees weighing an Overseas Citizen of India (OCI) path, this rule can trigger a tax bill on gains across worldwide assets, even if nothing is actually sold.

The key test for many readers is simple but strict: if your net worth is at least $2 million, or your average annual U.S. income tax bill for the prior five years is above roughly $201,000, or you fail to properly certify your past U.S. tax compliance on Form 8854, you may be treated as a Covered Expatriate. That status can switch on a “deemed sale” the day before expatriation, taxing unrealized gains above an inflation-adjusted exclusion amount that sits around $866,000 in 2025. In India, where families often hold appreciated real estate, mutual funds, foreign pensions, and U.S. market positions built over years abroad, the numbers add up fast.

How the deemed sale works

Under the deemed sale rule, the IRS treats you as if you disposed of everything the day before your status ends. That includes:

• Indian property and Indian mutual funds
• U.S. brokerage accounts
• Crypto holdings
• Foreign pensions and retirement accounts

Gains above the exclusion are generally taxed at U.S. capital gains rates. The policy aims to collect tax on appreciation that built up while the person was a U.S. tax resident, which creates heavy planning needs for those looking to give up status while settled back in India with OCI.

The three gates to Covered Expatriate status

The law essentially boils down to three tests:

1. Net worth test
   • Worldwide net worth of $2 million or more on the expatriation date → Covered Expatriate.
2. Tax liability test
   • Average annual U.S. income tax liability for the five tax years before expatriation above ~$201,000 → Covered Expatriate.
3. Compliance certification test
   • Failure to certify on Form 8854 that you complied with U.S. tax rules for the prior five years → Covered Expatriate (even if below the other thresholds).

Many India-based families trip on the last gate by mistake—missing filings, misreporting offshore holdings, or submitting the form late. Analysis by VisaVerge.com points out that missed or incomplete filings often turn a routine exit into a costly one because certification failure alone creates Covered Expatriate status.

Example: how the math can bite

Consider Anita, a long-time U.S. Green Card holder who moved back to India and plans to surrender her card:

• Mumbai flat with a $400,000 gain
• Indian mutual funds with a $150,000 gain
• 401(k) with $200,000 taxable

Her deemed total gain is $750,000. Depending on the year’s exclusion (around $866,000 in 2025) and how each item is taxed (PFIC rules, retirement plan rules, etc.), she may owe U.S. tax even though she did not sell anything in India or the U.S. The Expatriation Tax can bite hard because it aggregates gains across assets and applies a single exclusion once across them all.

Asset types that commonly cause trouble

• Indian mutual funds — Often treated as PFICs (Passive Foreign Investment Companies) by the U.S., leading to punitive tax outcomes and complex reporting.
• Indian real estate — Long-term appreciation in cities like Mumbai, Bengaluru, Delhi, or Pune can be substantial when converted to U.S. dollars.
• Crypto — Early purchases may show large paper gains.
• Foreign pensions / U.S. retirement accounts — Subject to special rules; some deferred items may become taxable at expatriation.

Because different asset types are treated differently, reviewing each holding well before the exit date is critical.

Practical timing and paperwork considerations

Timing and paperwork drive outcomes:

• The five-year lookback for taxes is strict.
• The certification on Form 8854 is the hinge—fileing five straight years of clean U.S. returns often avoids Covered Expatriate status if other thresholds are below.
• Fix missing or incorrect returns, including foreign reporting forms, before scheduling a Green Card surrender.
• Review PFIC holdings early; exiting them before expatriation can reduce future surprise tax.
• Some families plan property sales or other disposals before expatriation to manage gain recognition.
• Every move must be weighed against Indian tax consequences and family needs.

Family dynamics and coordination

The human impact is significant. Households often spread assets across property, gold, mutual funds, and U.S. shares. Family members may be in different stages of return:

• If one member triggers Covered Expatriate status and another does not, tax results can differ sharply.
• Couples must plan together; separate choices can lead to very different outcomes.
• Holding title in one spouse’s name and shifting before the exit date may help or harm depending on the facts.

The formal process to end U.S. tax residency requires correct filings with clear dates; the act of handing in a Green Card alone does not finish the tax side.

Treaty interaction and cross-border coordination

Many India-based returnees ask about the U.S.–India tax treaty. Key points:

• Treaty claims can help reduce double taxation risks in some areas, but the Expatriation Tax is a U.S. domestic rule based on the deemed sale concept.
• Families must review how India may tax any later actual sale and whether credits or timing strategies can help.
• For those with ongoing U.S. filing needs in the same year as expatriation, careful coordination helps avoid paying tax twice on the same gain.
• People continuing to hold U.S. assets after expatriation must track how future income streams will be taxed as nonresidents.

Retirement accounts and pensions

The Expatriation Tax has special rules for deferred items and tax-deferred accounts:

• Income from some accounts can become taxable under provisions triggered by expatriation.
• The mechanics differ by account type, so list each account and seek advice before finalizing the exit date.
• The deemed sale framework does not treat every item the same way; last-minute mismatches can lead to avoidable tax.

Practical Indian considerations after expatriation

Many returnees want to consolidate money into India and invest locally. In most cases:

• Once you expatriate and correctly file Form 8854, you stop being a U.S. tax resident and U.S. rules like PFIC reporting no longer apply to future Indian investments.
• That freedom motivates people to complete the U.S. process properly—but only if done right.

Recordkeeping and technical details that matter

Even small details can change the final bill:

• Exchange rates, exact holding periods, and the calendar of actions before expatriation affect outcomes.
• Selling a PFIC before the exit date may create a current tax hit but save more overall.
• Delaying a property sale until after expatriation may reduce U.S. exposure but increase Indian tax.
• Gather proofs: purchase deeds, renovation costs, brokerage statements, and PFIC statements months before the expatriation date.
• Keep clean U.S. filings for the five prior years—these returns are part of the Form 8854 certification.

Exclusion amount and inflation adjustments

• The exclusion amount (about $866,000 in 2025) is inflation-adjusted and changes over time.
• A lifetime of gains across multiple asset classes can exceed the exclusion quickly, even for middle-class savers with a highly appreciated flat plus strong mutual fund performance.

Additional charges to watch

A lesser-known factor: the U.S. may impose a 3.5% excise tax on remittances by non-U.S. citizens (including Green Card holders) sending money abroad. Large transfers timed around expatriation may trigger additional costs — some people stagger remittances or plan timing around the expatriation date.

Who has a simpler exit?

If you meet all three safe tests, the exit is simpler:

• Below $2 million net worth
• Below the five-year average tax threshold (~$201,000)
• Able to certify compliance on Form 8854

Even then, final U.S. returns and reporting are mandatory. Certification failure can still push you into Covered Expatriate status, so these filings must be taken seriously.

Practical checklist recommended by advisers

Before setting an expatriation date, many advisers suggest:

1. Confirm five clean U.S. returns are on file.
2. Gather proofs for asset basis (deeds, receipts, statements).
3. Analyze PFIC exposure and consider exits where practical.
4. Map property timing for sales or holds with attention to Indian tax.
5. Review treaty positions with a cross-border tax professional.
6. Fill out and submit Form 8854 correctly and on time.

Keep a simple file with dates, forms, and receipts. Share the calendar with family members to avoid accidental triggers.

Where to find official guidance

For official material, see the IRS overview on the Expatriation Tax: https://www.irs.gov/individuals/international-taxpayers/expatriation-tax

For the certification form itself, see About Form 8854: https://www.irs.gov/forms-pubs/about-form-8854

The stakes for this single piece of paper are high. If you fail to file it properly, you can be treated as a Covered Expatriate even if your wealth and five-year tax liability are modest.

Final takeaways

• The Expatriation Tax is blunt but clear: it captures built-up gains the day before expatriation.
• Knowing the thresholds—$2 million net worth, about $201,000 five-year average tax, and strict compliance via Form 8854—gives families a fair chance to act early.
• With orderly steps—lining up filings, checking PFICs, planning property timing, confirming treaty posture, and submitting Form 8854 correctly—many India-based returnees can avoid Covered Expatriate status or significantly reduce the tax impact.
• For those already planning a move, the direct message is: line up your filings, check your PFICs, plan your property timing, confirm your treaty posture, and submit Form 8854 correctly. Done right, the end of U.S. tax residence can be a clean handover to life and investing in India.