(UNITED STATES) — As NRIs invest in U.S. markets—from stocks and ETFs to real estate and retirement accounts—their Indian residency status (NRI/RNOR vs ROR) and U.S. tax residency shape whether income is taxed in the U.S., India, or both, and whether foreign tax credits under the India–USA DTAA are available.
Cross-border investing sounds simple: buy assets in the United States and track returns in dollars. Tax is where it gets hard. Two separate “residency” tests run at the same time—one under India’s Income-tax Act, and one under U.S. rules. The answer to “who taxes what” often changes when you move back to India and shift from RNOR to ROR.
1) Residency status: the switch that changes everything
india uses days-in-India tests. You are generally Resident in India in a financial year if you meet either condition:
- Stay in India 182 days or more in that year, or
- Stay in India 60 days or more in that year and 365 days or more in the 4 preceding FYs
If you do not meet those, you are an NRI.
If you are resident, a second filter decides whether you are RNOR (resident but not ordinarily resident) or ROR (Resident and Ordinarily Resident). A common RNOR route is limited India presence over the prior years, such as total stay of 729 days or less in the 7 preceding FYs.
Tax impact in India is the core point:
- NRI / RNOR: India typically taxes only Indian-sourced income.
- ROR: India typically taxes worldwide income, including U.S. income.
The U.S. runs its own residency test. You are usually a U.S. tax resident if you hold a Green Card or meet the Substantial Presence Test (SPT). The SPT is based on a weighted count of U.S. days across three years (details at https://www.irs.gov/). U.S. tax residents are generally taxed on worldwide income.
One person can be NRI or RNOR in India and U.S. tax resident at the same time. That “split” drives most NRIs’ U.S. investing tax outcomes.
2) Common U.S. investments NRIs hold
NRIs often invest through a U.S. brokerage account, employer benefits, or direct ownership:
- U.S. stocks and ETFs (NYSE, NASDAQ; index ETFs)
- U.S.-domiciled mutual funds and managed portfolios
- Real estate (rentals), plus REITs
- Retirement accounts such as 401(k), Traditional IRA, Roth IRA
- Interest-bearing assets like bank deposits, bonds, and Treasury securities
3) How the United States typically taxes these investments
U.S. tax depends on whether you are a U.S. tax resident or a nonresident. Many employed NRIs in the United States become U.S. tax residents under the SPT.
- Capital gains (stocks/ETFs): Short-term gains are taxed at ordinary rates. Long-term gains (held more than 1 year) often get concessional federal rates: 0% / 15% / 20%.
- Dividends: May be “qualified” (often taxed at 0% / 15% / 20%) or “ordinary” (taxed at ordinary rates). Brokerage withholding can apply in some setups.
- Rental income: Net rental income is typically taxed as ordinary income, with deductions like expenses and depreciation.
- Retirement accounts: Traditional 401(k)/IRA withdrawals are often taxable as ordinary income. Roth accounts can be tax-free in the U.S. if rules are met.
- Interest: Usually taxed as ordinary income, with specific exemptions for certain U.S. instruments under U.S. law.
4) India’s treatment depends on NRI/RNOR vs ROR (and that is the point)
NRI or RNOR years often feel “quiet” in India. Foreign income—like U.S. dividends, U.S. capital gains, and U.S. rent—typically is not taxed in India during those years, because it is not Indian-sourced.
ROR years are different. Once you are ROR, India usually taxes worldwide income. The same U.S. dividends or gains can now appear on both returns. You then rely on DTAA relief through Foreign Tax Credit (FTC), not an exemption.
Table 1: U.S. investment types and expected tax treatment
| Investment Category | U.S. Tax Treatment (as of residency) | Indian Tax Consideration (NRI/RNOR vs ROR) | Notes |
|---|---|---|---|
| U.S. stocks | U.S. tax residents: capital gains taxed; long-term often 0% / 15% / 20% | NRI/RNOR: usually not taxed in India; ROR: taxed in India with FTC possible | Holding period “more than 1 year” matters in U.S. |
| ETFs / index funds | Similar to stocks; distributions may be dividends or gains | NRI/RNOR: usually outside India tax; ROR: can create category and timing mismatches | Reporting is heavier when ROR |
| U.S. mutual funds | Distributions taxed in U.S.; can be ordinary or qualified | NRI/RNOR: usually not taxed in India; ROR: may face harder character mapping for FTC | Often cited as tax-inefficient when returning to India |
| U.S. real estate (rental) | Net rent taxed as ordinary income; deductions and depreciation allowed | NRI/RNOR: usually outside India tax; ROR: taxable in India, plus Schedule FA reporting | Depreciation differences can limit FTC match |
| REITs | Often dividend-heavy; taxed under U.S. rules | NRI/RNOR: typically outside India; ROR: taxable with FTC limits | Distributions may not behave like stock dividends |
| 401(k), Traditional IRA | Growth tax-deferred; withdrawals often taxable | NRI/RNOR: usually outside India until ROR; ROR: withdrawals may be taxable in India | Timing mismatch is common |
| Roth IRA / Roth 401(k) | Qualifying withdrawals may be tax-free in U.S. | ROR: India may not mirror U.S. Roth treatment | Needs case-by-case review |
| Bank interest / bonds | Interest often ordinary income | NRI/RNOR: generally outside India; ROR: taxable in India with FTC | Some U.S. exemptions may not carry to India |
5) DTAA and Foreign Tax Credit: how relief works in practice
The India–USA DTAA helps allocate taxing rights and reduce double taxation. In many ROR situations, the practical tool is Foreign Tax Credit (FTC) in India, claimed via Form 67 under Rule 128.
FTC is usually limited to the lower of:
- Indian tax on that foreign income, or
- U.S. tax actually paid on that income
⚠️ DTAA prevents double taxation, but does not eliminate the need to file and report in both countries.
Table 2: DTAA relief and FTC flow
| Income Type | U.S. Tax When Source | India Tax (ROR) | DTAA/FTC Mechanism | Form 67 Requirement |
|---|---|---|---|---|
| Dividends | Taxed in U.S. (rate depends on qualified vs ordinary) | Taxed in India for ROR | Claim FTC up to Indian tax on that dividend income | Yes, with proof of U.S. tax paid |
| Capital gains (stocks/ETFs) | Taxed in U.S.; long-term may be 0% / 15% / 20% | Taxed in India for ROR | FTC limited by Indian tax on those gains | Yes |
| Rental income (real estate) | Net rent taxed in U.S. after deductions | Taxed in India for ROR | FTC possible, but mismatched deductions can reduce usable credit | Yes |
| Retirement withdrawals | Often taxable in U.S. (Traditional); Roth may be tax-free | May be taxable in India for ROR | FTC depends on whether U.S. tax was paid and income is taxed in India | Yes when claiming FTC |
| Interest | Taxed in U.S. unless exempt | Taxed in India for ROR | FTC up to Indian tax on interest | Yes |
A practical timing note: many taxpayers began treating December 20, 2024 as a hard internal deadline marker for tightening Form 67 documentation cycles, because missing Form 67 timing can block FTC in India.
6) Case study: RNOR with U.S. stock gains
Facts (typical profile):
- India status: RNOR
- U.S. status: U.S. tax resident
- U.S. long-term capital gains: USD 40,000
- U.S. tax paid: USD 6,000
Outcome in many cases:
- Tax in the United States: yes
- Tax in India: typically no, because RNOR is usually taxed only on Indian-sourced income
- DTAA/FTC in India: generally not needed for that income
This is why the RNOR period is often seen as a “bridge.” It can be calm. It does not last forever.
7) Case study: ROR with mixed U.S. income and FTC mechanics
Facts (common after a return to India with ongoing U.S. holdings):
- India status: ROR
- U.S. status: U.S. tax resident
- U.S. dividends + capital gains: USD 60,000
- U.S. tax paid: USD 12,000
What tends to happen:
- The United States taxes the income under U.S. rules.
- India taxes the same income because ROR is on worldwide income.
- India allows FTC, but only up to the Indian tax on that foreign income.
Example of the limit: if Indian tax computed on that USD 60,000 slice equals USD 10,000 (after conversion and rate effects), FTC may be capped at USD 10,000 even if U.S. tax paid was USD 12,000. The excess often does not reduce Indian tax.
8) Asset-type friction points NRIs should watch
- U.S. mutual funds and ETFs: Classification and timing can differ across countries. A U.S. “distribution” can be ordinary income in one system and treated differently in the other. Currency conversion can also create a paper gain in INR when USD returns look flat.
- U.S. real estate: Depreciation is a repeat trouble spot. The U.S. may allow depreciation deductions annually, while India’s rental income computation uses its own method. A mismatch can leave you with U.S. tax paid that does not line up cleanly with Indian taxable income for FTC.
- Retirement accounts: Timing is the biggest issue. U.S. tax often happens at withdrawal for Traditional accounts. India tax may apply once you are ROR and receiving amounts. Roth treatment can diverge, so “tax-free in the U.S.” does not always mean “tax-free in India.”
9) India compliance when you become ROR (and why penalties matter)
ROR status often triggers new forms and disclosures:
- Schedule FA: foreign assets must be disclosed, including U.S. bank accounts, brokerage accounts, and retirement accounts.
- Form 67: required to claim FTC, with supporting U.S. tax proof.
- Foreign income reporting: dividends, gains, rent, and interest must be placed under the correct heads.
India can apply strict consequences for non-disclosure under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The risk is not theoretical, especially when information exchange is in play.
Non-disclosure of foreign assets or income as an ROR can trigger penalties under Indian law; ensure Schedule FA and Form 67 are filed on time and coordinate with Indian and U.S. tax professionals.
✅ If you anticipate becoming an ROR, start preparing Form 67 and Schedule FA documentation now, and coordinate with U.S. and Indian tax professionals
Key takeaway: residency status (NRI/RNOR vs ROR) is often the decisive factor that changes whether foreign income is taxed in India, whether FTC applies, and what compliance you must complete.
This article discusses cross-border taxation for NRIs and must include qualified language and disclaimers.
Tax treatment depends on individual circumstances; readers should consult a qualified tax professional.
File Form 67 on time, reconcile U.S. tax proof early, and treat Schedule FA as mandatory once you are ROR.
This guide explores how Indian residency status—NRI, RNOR, or ROR—affects the taxation of U.S. assets like stocks, real estate, and 401(k)s. While RNOR status offers a temporary tax ‘bridge,’ ROR status requires reporting worldwide income in India. It highlights the importance of the India–USA DTAA, the mechanism of Foreign Tax Credits, and the necessity of filing Form 67 and Schedule FA to ensure compliance.
