Top 7 U.S. Tax Mistakes OCI Cardholders Must Avoid (2025)

(INDIA) A growing number of U.S. citizens of Indian origin who hold Overseas Citizen of India (OCI) status are confronting an expensive reality as tax season approaches: the card in their wallet does not change their duty to the Internal Revenue Service. For many OCI cardholders living in Indian cities or shuttling between the United States 🇺🇸 and India 🇮🇳, the belief that their Indian status shields them from U.S. taxes on Indian earnings has lingered for years. It does not. Under U.S. law, citizens must report worldwide income every year, no matter where they live or where that income is earned.

Core rule and common mistakes

That core rule—reporting worldwide income—sits at the heart of avoidable mistakes that are now tripping up people who split their lives between two countries.

• Common errors include:
  • Omitting Indian rental income
  • Ignoring interest from NRE/NRO bank accounts
  • Misusing the Foreign Earned Income Exclusion (FEIE)
  • Forgetting extra reporting rules for foreign accounts (FBAR, FATCA)

According to analysis by VisaVerge.com, these gaps can create a sequence of back taxes, penalties, and audits that turn a simple filing into a multi‑year problem.

OCI vs. U.S. tax residency — the key distinction

The first misunderstanding is often about residency. OCI is an Indian immigration status that allows visa-free entry and long-term stay in India. It is not a U.S. tax category.

• The IRS still treats a U.S. citizen as a full U.S. taxpayer. That means filing a U.S. return each year, commonly on Form 1040.
• People moving to Bengaluru, Pune, Mumbai or other Indian cities must still account for their U.S. taxes. The OCI card does not change that filing duty.

Rental property and property sales — what the IRS sees

Many U.S. citizens keep property in India and later rent or sell it. The IRS treats rental streams and sales as taxable events with multiple components:

• Rent received is taxable
• Depreciation must be calculated annually
• Property tax and home loan interest affect the return
• On sale, capital gains and depreciation recapture come into play

Skipping any of these items can draw IRS attention years later, with interest and penalties added onto the original tax.

Bank interest, NRE/NRO accounts, and disclosure rules

Bank interest in India is another common blind spot.

• Interest from NRE, NRO, fixed deposits, and savings is taxable by the U.S. and must be reported in dollars on Form 1040.
• Balances across Indian accounts can trigger separate reporting rules:
  • FBAR (FinCEN Form 114): file if combined foreign accounts exceed $10,000 at any time in the year — filed online through the U.S. Treasury, not with the tax return. See: https://www.fincen.gov/report-foreign-bank-and-financial-accounts
  • FATCA (Form 8938): file with the tax return if foreign assets exceed thresholds. See: https://www.irs.gov/forms-pubs/about-form-8938

These are disclosure rules — missing filings can lead to steep fines, including $10,000+ for FBAR failures and penalties starting at $10,000 (and up to $50,000) for Form 8938 noncompliance.

Foreign Earned Income Exclusion (FEIE) vs. Foreign Tax Credit

The FEIE causes confusion because its name sounds broader than it is.

• FEIE: covers earned wages or self‑employment income only (subject to bona fide residence or physical presence tests).
• FEIE does not cover:
  • Rent
  • Bank interest
  • Dividends
  • Mutual fund gains

For passive income items, the normal tool is the Foreign Tax Credit:

• Use Form 1116 to claim credit for taxes paid to India.
• The credit requires documentation, currency conversion, and correct classification of income types.

FBAR and FATCA — how they differ and why both matter

There are two separate foreign-account disclosure requirements:

1. FBAR (FinCEN Form 114)
   • Threshold: combined foreign accounts exceed $10,000 at any time during the year.
   • Filed online with Treasury: https://www.fincen.gov/report-foreign-bank-and-financial-accounts
   • Covers signature authority and joint accounts — these often count.
   • Penalties for failure can be severe.
2. FATCA (Form 8938)
   • Filed with your tax return: https://www.irs.gov/forms-pubs/about-form-8938
   • Applies to certain foreign financial assets if thresholds are met depending on filing status and residence.
   • Penalties start at $10,000 and can increase to $50,000 for continued noncompliance.

Confusing the two or failing to file either can trigger automatic flags from information flows between banks and tax authorities.

Cross-border tax coordination — double taxation and credits

A common assumption — “India taxed me, so the United States won’t” — is incorrect.

• A U.S. citizen must report worldwide income.
• If India taxed the income, claim the Foreign Tax Credit on Form 1116 to avoid double taxation.
• Without Form 1116, the IRS may compute U.S. tax as if no foreign tax was paid.

Depreciation recapture — the often-missed trap

Depreciation recapture is one of the biggest surprises for property owners:

• Landlords must claim depreciation each year on the U.S. return for rental property abroad.
• On sale, the IRS taxes part of the gain as recapture up to the amount of depreciation allowed or allowable, even if never actually claimed.
• This can create a large U.S. tax bill at sale time despite Indian tax paid at sale.

Residency definitions differ — be careful

The word “resident” has different meanings in Indian and U.S. tax codes:

• India: presence of 182 days or more in the tax year can make you an Indian tax resident.
• U.S.: a citizen is always a U.S. taxpayer regardless of days spent abroad.

Treating Indian residency rules as a substitute for U.S. obligations will lead to errors.

Practical filing checklist and recordkeeping

Start filing preparation by gathering complete records:

• Monthly Indian bank statements (interest details, maturity information on deposits)
• Year‑to‑date rent statements from property managers (rent collected, taxes paid, maintenance, mortgage interest)
• Documents showing Indian tax paid on income and on property sales
• Travel records and any documents required for e‑Arrival Cards or PAN–Aadhaar linking

Key filing steps every year:

1. File Form 1040
2. Include Form 1116 if claiming foreign tax credits
3. Include Form 8938 if foreign asset thresholds are met
4. Submit FBAR (FinCEN Form 114) online if combined accounts exceed $10,000: https://www.fincen.gov/report-foreign-bank-and-financial-accounts

Other practical notes — Indian administrative changes

Recent Indian measures affect documentation and travel:

• As of October 2025, India introduced an e‑Arrival Card requirement for foreign nationals, including OCI cardholders.
• OCI cardholders are expected to link PAN with Aadhaar to avoid penalties.

These Indian rules don’t change U.S. tax obligations, but they improve access to Indian banking and tax records — which helps when claiming credits or providing proof to the IRS.

Immigration and non-tax consequences

Tax compliance affects immigration milestones:

• People applying for U.S. citizenship via Form N‑400 often must demonstrate good moral character and tax compliance.
• Missing or inconsistent U.S. tax filings can delay U.S. citizenship approval.

For green card holders later naturalizing, or citizens needing a clean record after time abroad, tax filings become part of the paperwork officers review.

Best practices and final takeaways

The pattern is clear: cross-border lives require careful, proactive tax planning.

• Use FEIE only for earned wages if you qualify; use the Foreign Tax Credit for passive income.
• Track whether foreign accounts ever exceed $10,000 — that triggers FBAR.
• Determine whether your foreign asset values require Form 8938.
• Keep Indian tax and banking records organized to support U.S. filings.

Important: Being an OCI cardholder does not change how the IRS sees you as a U.S. citizen. You still report worldwide income, file a U.S. return, and disclose foreign accounts when thresholds are met.

Community outreach and earlier education can reduce mistakes. Small steps now — regular recordkeeping, early preparation, and, when needed, a cross‑border advisor — prevent big problems later.

If you are a U.S. citizen and an OCI cardholder, follow these concrete filing paths each year:
– File Form 1040
– Include Form 1116 for foreign tax credits when applicable
– Add Form 8938 if thresholds are met
– Submit FBAR via the Treasury’s site: https://www.fincen.gov/report-foreign-bank-and-financial-accounts

Keep bank letters, rent statements, and sale records handy — the U.S. side will fall into place when the Indian side is tidy.