Dual Taxation of Indian Startup Shares for US-Relocated Founders

India’s expanding startup community is facing a fresh wave of cross‑border tax questions as more founders relocate to the United States for funding and market access while still holding Indian startup shares. The shift has brought dual‑jurisdiction taxation squarely into focus this year, with founders taxed in India on capital gains and again in the United States once they become U.S. tax residents. That two‑country pull is now colliding with new Indian rules on how non‑residents compute gains on unlisted shares and with long‑standing U.S. rules that tax worldwide income, creating a delicate balancing act for people who move to the United States 🇺🇸 while keeping a stake in India’s startup boom.

U.S. taxation of worldwide capital gains and reporting obligations

At the center of the issue is a simple but heavy principle: the United States taxes residents on worldwide capital gains. Once a founder becomes a U.S. tax resident, the U.S. will tax gains on Indian startup shares, exercises of RSUs or ESOPs tied to Indian companies, and sales of those holdings, no matter where the company is based or where the sale happens.

Founders must report these gains on their annual U.S. tax return using Form 1040 and list the gains on Schedule D. They also face foreign asset reporting rules:

• FATCA disclosures for specified foreign financial assets (see IRS FATCA guidance).
• FBAR reporting for foreign financial accounts via the U.S. Treasury portal; details at FinCEN’s FBAR page.

These filings are routine for many international entrepreneurs but carry sharp penalties if ignored. They also layer onto the timing and valuation questions that come with startup equity.

Real‑world scenarios and special U.S. forms

The complexity becomes clear in real cases. Consider a founder who received sweat equity in 2022 and moved to the U.S. on an H‑1B in 2024. From the moment they are a U.S. tax resident, the U.S. will tax future gains on those shares. That founder would:

1. Report gains on Form 1040.
2. Report sales on Schedule D.
3. Monitor FATCA and FBAR reporting for foreign holdings or sale proceeds.

If the Indian company is investor‑heavy and meets Passive Foreign Investment Company (PFIC) criteria, the founder must also file Form 8621 for each PFIC in which they are a (direct or indirect) shareholder. PFIC rules can be costly if not handled early.

PFIC risks and elections

• PFIC tests focus on income and assets, not headcount or product progress.
• Startups with large funding rounds but limited active income/assets can meet PFIC thresholds.
• Filing Form 8621 may require PFIC elections that change how gains are recognized and when tax is due.
• The filing is annual, so early planning and accurate records are essential.

Double taxation and the foreign tax credit

A common scenario: a founder sells Indian shares after moving to the U.S. and faces taxation in both countries. India taxes the sale under its capital gains rules, and the U.S. taxes the gain because the founder is a U.S. tax resident at sale time.

The saving grace is the foreign tax credit (FTC), which can offset U.S. tax on the same income when properly documented. Key points:

• Indian capital gains tax paid can offset U.S. tax on the same income, subject to U.S. limits and timing rules.
• The FTC does not eliminate U.S. reporting duties, but it can reduce the net U.S. tax burden if the credit is claimed correctly.
• The IRS provides guidance on the FTC; founders rely on proof of Indian tax paid to support the claim.

Indian rules for non‑residents holding startup equity

India’s tax code has specific rules that shape outcomes for non‑residents:

• Long‑term capital gains (LTCG) on unlisted shares (typical for startups) are taxed at a flat 12.5% when held for more than 24 months.
• Non‑resident investors do not get indexation for inflation on unlisted shares.
• Shorter holds face short‑term capital gains at applicable rates.
• Tax Deducted at Source (TDS) applies to capital gains for non‑residents, with TDS at 20%, plus surcharge and cess as applicable, collected at sale or remittance.

Those withheld taxes often become the backbone of proof used later to support a foreign tax credit claim in the U.S., provided categories and timing align.

Clause 72(6): compute gains in foreign currency

A notable change: India’s 2025 Income Tax Bill introduced Clause 72(6), allowing non‑residents to compute capital gains on unlisted shares in the foreign currency used to buy those shares (often USD), and then translate to rupees. This protects non‑residents from inflated Indian gains due to rupee depreciation.

Practical effects:

• Prevents overstated gains caused by rupee depreciation over long holdings.
• Can significantly reduce LTCG in examples where exchange rates moved sharply.
• Creates better alignment between economic reality and taxable gain.

Example workflow:
1. Compute both purchase price and sale price in the original foreign currency (e.g., dollars).
2. Translate the computed gain into rupees for Indian tax purposes.

The U.S. will continue to tax the gain in dollars, and the foreign tax credit in the U.S. reflects Indian tax paid on this refined base, improving cross‑border coordination.

Planning before the move: vesting, exercises and documentation

Dual‑jurisdiction taxation demands planning well before relocation. Key considerations:

• Timing of vesting and exercise for RSUs and ESOPs can determine whether income is taxed in India or the U.S.
• Pre‑move restructuring and clean valuation work with board approvals reduce future disputes.
• Maintain contemporaneous:
  • Board resolutions
  • Valuation reports
  • Grant agreements

Many also assess whether the Indian company qualifies as a “qualified foreign corporation” for specific U.S. tax treatments. Cap table structure matters because investor‑heavy setups can trigger PFIC status, leading to Form 8621 filings and elections.

Handling sale proceeds and bank accounts

Founders in the U.S. should carefully manage Indian bank accounts and remittances:

• Use the correct type of account (NRE, NRO, FCNR) for sale proceeds and transfers.
• Proper account choice makes it easier to document Indian taxes paid and move funds without extra delays.
• The Double Taxation Avoidance Agreement (DTAA) between India and the U.S. provides a framework, but it hinges on correct filings in both countries.
• If categories or tax years do not align, the foreign tax credit may not provide expected relief.

Character mismatches, carried interest and side vehicles

Additional complexities arise when income character differs between countries:

• The U.S. taxes carried interest and foreign founder shares; the character of income matters for FTC matching.
• When a payout is ordinary income in one country and capital gain in another, FTC relief can be limited.
• Advisors may adjust timing or structure (legally) to align income character and improve credit utility.
• The goal is not to chase loopholes but to ensure relief tools work when a cross‑border deal closes.

Documentation, disclosure and common filing stack

For U.S. tax purposes, the watchwords are documentation and disclosure. Common filings for cross‑border founders include:

• Form 1040 — U.S. individual tax return
• Schedule D — capital gains/losses
• FATCA disclosures — per IRS guidance
• FBAR — file at FinCEN’s FBAR page
• Form 8621 — for PFICs, if applicable

Founders who get the filings right find the process manageable; small errors (missing an FBAR account or mislabeling gain categories) can grow into larger issues if not corrected quickly.

Timing issues, exchange rates and the foreign tax credit

Timing mismatches cause frequent headaches:

• Indian and U.S. tax years do not align perfectly.
• Sale date, payment date, and remittance date can fall into different tax periods across jurisdictions.
• The FTC typically matches tax paid to the year the income is included in the U.S., so founders may need to:
  • Wait to claim a credit until Indian tax is actually paid, or
  • Use carryforward/carryback rules where applicable.

Exchange rates matter for U.S. reporting even when India allows foreign‑currency computation. U.S. reporting uses dollars for everything; choices about which exchange rate to use must be consistent and well documented (spot rate on sale date, average rates for certain income, or broker rates).

Practical founder experiences and common advice

Founders report real stresses: paying lawyers and accountants in two countries, digging up old board minutes to prove sweat equity, and selling equity while running a company. Common advice:

• Plan early—“plan beats panic.”
• Get valuation work done and contemporaneous documentation in order.
• Set up the correct bank accounts (NRE/NRO/FCNR) and keep clear records of tax withheld and paid.
• Map FTC position early and collect proof of Indian tax paid.

Analysis by VisaVerge.com indicates founders who prepare FTC documentation early report cleaner U.S. results and fewer disputes.

Employee and investor impacts

This is not only a founder problem. Investors and employees with ESOPs/RSUs face similar rules:

• RSU vesting tied to U.S. arrival can generate ordinary income in the U.S., followed by capital gains on later sales.
• PFIC exposure can affect employees and alumni depending on share structure and income generation.
• Companies increasingly provide tax letters and valuation summaries to help employees with cross‑border reporting.

Ecosystem implications and the path forward

India wants to retain entrepreneurship momentum even as capital and talent move globally. The policy choices aim to:

• Let non‑residents compute gains in foreign currency (Clause 72(6)).
• Retain a predictable LTCG rate of 12.5% for unlisted shares.
• Collect TDS at 20% at source for non‑residents while enabling treaty relief and FTC mechanisms.

For the U.S. side, full reporting is required (Form 1040, Schedule D, FATCA, FBAR, and Form 8621 where PFICs apply). The system offers the foreign tax credit to avoid true double taxation when properly documented.

If playbooks developed by advisors hold—mapping residency dates early, assessing PFIC exposure, gathering grant paperwork—founders should face fewer surprises. Deal lawyers in India are already adjusting closing checklists to capture proof of tax paid and document TDS at 20% for non‑residents, while U.S. advisors prepare cross‑border playbooks that start with residency and PFIC mapping.

Key takeaways and next steps

Founders should treat cross‑border tax as a planning issue, not an afterthought. Early documentation, careful timing, and clear record‑keeping reduce the chance of disputes and maximize available relief.

Actionable next steps for founders moving to the U.S. with Indian startup shares:

1. Establish your U.S. residency date and map expected tax consequences.
2. Inventory equity holdings, vesting schedules, and exercise windows.
3. Assess PFIC exposure and potential Form 8621 obligations.
4. Gather contemporaneous board resolutions, valuation reports, and grant agreements.
5. Use the proper Indian bank accounts (NRE, NRO, FCNR) for sale proceeds and documentation.
6. Track Indian taxes paid and collect proof to support the U.S. foreign tax credit claim.
7. File FATCA, FBAR (FinCEN’s FBAR page), and all applicable U.S. forms on time.

The road is demanding but navigable. India’s foreign‑currency option and stable 12.5% LTCG rate on unlisted shares help reduce friction from currency swings, while U.S. reporting and the foreign tax credit provide mechanisms to avoid true double taxation—if founders and advisors do the work early and keep meticulous records.