Comparative Analysis of Salaried Employee Taxation in USA and India

Key Takeaways

• US taxes salaries using a progressive federal system with up to 37%, plus possible state taxes.
• India’s new tax regime for FY 2024–25 sets rates from 0% to 30%, plus cess.
• US standard deduction is $14,600; India automatically grants ₹50,000 to salaried employees.

When salaried employees move between the United States 🇺🇸 and India 🇮🇳, understanding how each country taxes income is essential for smart financial planning. Both countries have their own tax authorities—the Internal Revenue Service (IRS) in the United States and the Income Tax Department in India. Each system is shaped by its own laws: the Internal Revenue Code (IRC) in the United States and the Income Tax Act, 1961 in India. While both countries collect taxes from salaries, the way they do it, the rates they charge, and the benefits they offer can be quite different. This comparison will help you see how each system works, what you need to do to stay compliant, and which might be better for your situation.

Key Tax Authorities and Laws

• United States 🇺🇸: The IRS is the main tax authority. All rules come from the Internal Revenue Code. The tax year runs from January to December, and tax returns are due by April 15 each year.
• India 🇮🇳: The Income Tax Department enforces the Income Tax Act, 1961. The financial year is from April to March, with most returns due by July 31 (October 31 for audit cases).

Income Classification for Salaried Employees

Both countries tax salaries, but what counts as salary and how it’s reported differs:

• United States 🇺🇸: Salary includes wages, bonuses, commissions, and fringe benefits (like health insurance or company cars). Employers give employees a Form W-2 each year, showing total earnings and taxes withheld. You can find more about Form W-2 on the official IRS website.
• India 🇮🇳: Salary covers basic pay, allowances, perquisites (extra benefits), bonuses, gratuity, and pensions. Employers issue Form 16, which lists income and tax deducted at source (TDS).

Tax Slabs and Rates

The way each country sets tax rates is different. The United States uses a progressive system with several brackets, while India has both old and new regimes with different slabs.

United States 🇺🇸 (Federal Rates for 2024, Single Filers):

• Up to $11,600: 10%
• $11,601 to $47,150: 12%
• $47,151 to $100,525: 22%
• $100,526 to $191,950: 24%
• $191,951 to $243,725: 32%
• $243,726 to $609,350: 35%
• Above $609,351: 37%

Note: Many states also charge income tax, which can add 0–13% more, depending on where you live.

India 🇮🇳 (FY 2024–25, New Tax Regime, Age < 60):

• Up to ₹3,00,000: 0%
• ₹3,00,001–₹7,00,000: 5%
• ₹7,00,001–₹10,00,000: 10%
• ₹10,00,001–₹12,00,000: 15%
• ₹12,00,001–₹15,00,000: 20%
• Above ₹15,00,000: 30%

Additional surcharge and a 4% health and education cess apply to higher incomes.

standard deduction

A standard deduction is a fixed amount you can subtract from your income before calculating tax.

• United States 🇺🇸: $14,600 for single filers, $29,200 for married couples filing jointly. You can choose this or itemize deductions (list specific expenses).
• India 🇮🇳: ₹50,000, automatically given to all salaried employees and pensioners.

Other Deductions and Exemptions

Both countries offer ways to lower your taxable income, but the options and limits are different.

United States 🇺🇸:
– Retirement Savings: 401(k) plans let you save up to $23,000 (under 50) or $30,500 (50+). Traditional IRA limits are $7,000 (under 50) or $8,000 (50+), with some income restrictions.
– Medical: Health Savings Accounts (HSA) allow $4,150 (individual) or $8,300 (family), with an extra $1,000 for those 55+. Medical expenses can be deducted if they exceed 7.5% of your adjusted gross income.
– Education: Up to $2,500 in student loan interest and tuition credits per year, with income limits.
– Housing: Mortgage interest on up to $750,000 of home loans is deductible.
– Investments: No broad deduction for investments unless you itemize, but some tax deferral options exist.

India 🇮🇳:
– Retirement Savings: National Pension System (NPS) allows up to ₹1.5 lakh under section 80C, plus an extra ₹50,000 under 80CCD(1B). Employee Provident Fund (EPF) and Public Provident Fund (PPF) are also included in the ₹1.5 lakh cap.
– Medical: Section 80D allows ₹25,000 for self and family, ₹25,000 for parents, and ₹5,000 for preventive checkups. For senior citizens, the limit is ₹50,000.
– Education: Section 80E lets you deduct interest on education loans for up to 8 years, with no upper limit.
– Housing: Home loan interest up to ₹2 lakh is deductible under section 24b, and principal repayment is part of the ₹1.5 lakh 80C limit. House Rent Allowance (HRA) is also exempt based on salary and rent paid.
– Investments: Section 80C covers up to ₹1.5 lakh for various investments like life insurance, ELSS, PPF, NSC, and tuition fees.

Filing and Compliance

Staying compliant means following the right steps and using the correct forms.

• United States 🇺🇸:
  • Tax ID: Social Security Number (SSN)
  • Reporting: Employers provide Form W-2
  • Withholding: Based on Form W-4, which employees fill out to tell employers how much tax to withhold
  • Self-assessment: Some people must make quarterly estimated tax payments
  • Filing Portal: IRS official website
• India 🇮🇳:
  • Tax ID: Permanent Account Number (PAN)
  • Reporting: Employers provide Form 16
  • Withholding: Tax Deducted at Source (TDS) by employer
  • Self-assessment: Advance tax payments if required
  • Filing Portal: Income Tax Department official website

Side-by-Side Comparison: Requirements, Timelines, and Costs

Pros and Cons for Different Situations

For Lower and Middle-Income Salaried Employees:

• India 🇮🇳:
  • Pros: Lower tax rates, generous basic exemption (₹3,00,000), and many deductions (80C, 80D, HRA, etc.) can reduce tax to almost zero for incomes up to ₹12–15 lakhs if planned well.
  • Cons: The system can be complex, especially if you want to claim many deductions.
• United States 🇺🇸:
  • Pros: Simple standard deduction, easy filing for most people, and clear tax brackets.
  • Cons: Fewer deductions unless you itemize, and even after the standard deduction, someone earning $50,000 may pay 10–12% in federal tax.

For High-Income Salaried Employees:

• India 🇮🇳:
  • Pros: Still offers many deductions, but the top marginal tax rate is high (30% base, plus surcharge and cess, up to ~42.74%).
  • Cons: The more you earn, the higher the effective tax rate, especially after surcharges.
• United States 🇺🇸:
  • Pros: Top federal rate is 37%, and some states (like Florida and Texas) have no state income tax, which can lower your total tax burden.
  • Cons: In high-tax states (like California), state tax can add up to 13% more.

Standard vs. Itemized Deductions

• United States 🇺🇸: Most people use the standard deduction, which is simple. If you have large expenses (like mortgage interest or medical bills), you can itemize, but this is less common.
• India 🇮🇳: The old tax regime lets you claim many deductions (80C, 80D, HRA, etc.), which can lower your tax a lot. The new regime is simpler but offers fewer deductions.

Flexibility and Simplicity

• United States 🇺🇸: The system is designed for simplicity, especially for those who don’t have many deductions. The IRS provides clear forms and instructions.
• India 🇮🇳: The system is more flexible, especially under the old regime, but this means more paperwork and planning.

Retirement and Employer Benefits

• United States 🇺🇸: Higher limits for retirement savings (401(k), IRA), and many employer benefits (like health insurance and stock options) are tax-advantaged.
• India 🇮🇳: Lower limits for retirement savings, but broader coverage under section 80C. Most perquisites are taxable.

Healthcare Incentives

• United States 🇺🇸: Health Savings Accounts (HSA) offer tax benefits for medical expenses.
• India 🇮🇳: Section 80D allows deductions for health insurance premiums.

Decision-Making Framework: Which System is Better for You?

When deciding which system works better for you, consider these factors:

1. Income Level: If you are a lower or middle-income earner, India’s system (especially the old regime) can mean much lower taxes due to many deductions. For high-income earners, the United States may offer a lower effective tax rate, especially in states with no income tax.
2. Complexity vs. Simplicity: If you prefer a simple system with fewer choices, the United States is easier. If you want to maximize deductions and don’t mind extra paperwork, India’s old regime gives more options.
3. Retirement Planning: The United States allows higher contributions to retirement accounts, which can help you save more for the future.
4. Employer Benefits: If your employer offers health insurance, stock options, or retirement plans, the United States system often gives better tax treatment.
5. Healthcare Needs: Both countries offer some tax relief for medical expenses, but the methods are different.
6. State Taxes (United States): Where you live in the United States can make a big difference. States like Florida and Texas have no income tax, while California and New York have high rates.

Recommendations for Specific Circumstances

• If you are a salaried employee moving from India to the United States: Prepare for a simpler but less flexible tax system. Learn about the standard deduction and see if you qualify for any itemized deductions. Check if your new state has income tax.
• If you are moving from the United States to India: Take time to understand the many deductions available under the old regime. If you want a simpler process, consider the new regime, but know you’ll lose most deductions.
• If you are a high-income earner: In India, plan for higher taxes due to surcharges and cess. In the United States, consider living in a no-income-tax state to reduce your total tax burden.
• If you want to maximize retirement savings: The United States offers higher limits, but India’s section 80C covers a wide range of savings and investments.

Practical Guidance and Next Steps

• Stay compliant: Always file your taxes on time using the correct forms—Form W-2 in the United States and Form 16 in India.
• Use official resources: For the United States, visit the IRS official website. For India, use the Income Tax Department portal.
• Plan ahead: If you expect to move between countries, talk to a tax advisor who understands both systems. This can help you avoid double taxation and make the most of deductions and credits.
• Keep records: Save all documents related to your income, deductions, and taxes paid. This is important for both compliance and future planning.

Summary Table: Which System Favors Whom?

Final Thoughts

Both the United States and India have tax systems designed to collect revenue fairly while encouraging saving, investment, and social security. The United States system is simpler, with fewer choices but higher limits for retirement and employer benefits. India’s system, especially under the old regime, is more complex but offers many ways to reduce your tax bill if you plan carefully.

As reported by VisaVerge.com, understanding the details of each system is key to making smart decisions about where to work, how to save, and how much tax you’ll pay. Whether you’re planning a move, already living abroad, or just want to make the most of your salary, knowing the basics of taxation, the role of the Internal Revenue Service, and the main features of the Income Tax Act will help you stay ahead.

For more details on U.S. tax forms and official guidance, visit the IRS official website. If you’re in India, the Income Tax Department portal is your best resource for up-to-date information.

By comparing both systems side by side, you can choose the best approach for your situation and make sure you’re making the most of your hard-earned income, wherever you are.

Learn Today

Internal Revenue Service (IRS) → US government agency responsible for tax collection and enforcement under the Internal Revenue Code.
Income Tax Department → Indian government body that administers and enforces the Income Tax Act, 1961.
Form W-2 → US tax form reporting wages and taxes withheld by employers for salaried employees annually.
Form 16 → Indian certificate provided by employers showing salary income and tax deducted at source for filing.
Standard Deduction → Fixed amount deducted from income before tax calculation, differing by country and filer status.

This Article in a Nutshell

Navigating salary taxation between the US and India requires understanding distinct laws, forms, and rates. The US offers simpler filings and higher retirement benefits, while India provides flexible deductions and lower taxes for many. Choose wisely to optimize tax savings and remain compliant across borders.
— By VisaVerge.com