Green Card Holders with Indian Rentals: Key U.S. and India Tax Traps to Avoid

(U.S.) U.S. tax season is bringing fresh anxiety for many Indian property owners who now live in America as a Green Card holder. The reason is simple but far-reaching: rental income from a home or flat in India must be reported to the United States on Form 1040, even if tax was already paid in India. That worldwide income rule trips up thousands of families each year, and the consequences can be painful—IRS penalties, interest, missed tax relief, and, in serious cases, audits.

According to analysis by VisaVerge.com, the most common mistakes come from mixing Indian and U.S. systems without clear records and from assuming one country’s tax filing “covers” the other, when it does not.

The three-part framework that matters

• U.S. taxation of worldwide income: A Green Card holder is taxed in the United States on worldwide income, which includes rent from Indian property.
• Indian taxation of Indian property: India taxes income from immovable property located in India.
• Treaty relief through correct filing: The U.S.–India tax treaty lets taxpayers seek relief, but only if the person files correctly and claims the relief the right way.

In the U.S., relief usually comes through the Foreign Tax Credit on Form 1116, which can offset U.S. tax with income taxes actually paid in India. The rules sound simple; in practice, they require careful steps on currency conversion, recordkeeping, and matching deductions to the correct system.

Common traps and costly errors

• Silence is the most serious trap: some do not report Indian rental income on Form 1040 because they assume Indian taxes suffice. That is incorrect under U.S. law.
• Reporting rent but skipping steps: many filers skip U.S.-allowed depreciation for foreign residential property (30-year straight-line) or fail to convert rupees to dollars the way the IRS expects.
• Bank account thresholds: if rent flows into Indian bank accounts that total more than $10,000 at any time during the year, the filer must submit the FBAR (FinCEN Form 114). Missed FBARs can carry steep penalties.
• FATCA reporting: if overall foreign assets meet set thresholds, the IRS also expects Form 8938 with the tax return.

Why Indian tax paid does not automatically eliminate U.S. tax

• Paying Indian tax does not “wash away” U.S. tax. The Foreign Tax Credit only reduces U.S. tax up to limits and only for the income tax actually paid.
• The credit depends on how the U.S. return computes net rental income after U.S. deductions, which differ from Indian deductions.
  • India generally allows a 30% standard deduction plus eligible home-loan interest for rental property.
  • The U.S. allows actual expenses and depreciation over 30 years for foreign residential property.
• Trying to stack India’s 30% standard deduction on top of U.S. depreciation (or both countries’ deductions simultaneously) triggers errors and possible IRS adjustments.

Paperwork and reporting flow (U.S. perspective)

• Rental income is reported on Schedule E of Form 1040 using U.S. rules for gross rent, expenses, and depreciation.
• After computing U.S. net rental income, claim the Foreign Tax Credit on Form 1116 for Indian income taxes actually paid on that rental income.
• Currency conversions must be defensible: the IRS allows use of an annual average rate or an applicable period rate. Using informal “ballpark” rates invites scrutiny.
• The IRS will expect documentation showing how INR were converted into USD and how the credit matches the Indian tax paid.

TDS (Indian withholding) complications

• Tenants in India may deduct TDS on rent paid to a non-resident owner. That withheld tax can support a U.S. Foreign Tax Credit claim—but only if the owner:
  • Files the Indian tax return when required, and
  • Keeps proof of TDS and tax payments (challans, TDS certificates).
• Skipping Indian filings, or failing to reconcile TDS with Indian tax due, weakens the U.S. credit claim and can increase U.S. tax liability.

The role of recordkeeping

Good records are essential. Key documents include:
– Rent receipts and Indian bank statements
– Property tax bills, association charges, maintenance and repair invoices
– Home-loan interest certificates (if applicable)
– Cost basis and capital improvements ledger
– Annual U.S. depreciation schedule (30-year straight line for foreign residential property)
– Proofs of Indian tax payments, TDS certificates, and Indian return acknowledgments
– Copies of exchange rate sources used for INR→USD conversion

Strong records power Schedule E, support depreciation claims, and prove Indian taxes paid — and they are critical if the property is later sold (capital gains and depreciation recapture).

Consequences of misreporting or omission

• Failure to report rental income from India can lead to IRS penalties, interest, and increased audit risk.
• Missing FBAR when Indian bank balances exceeded $10,000 at any time can lead to substantial fines.
• Omission of Form 8938 when required creates another compliance failure.
• Fixing multiple years at once (amended returns, catch-up depreciation, amended Form 1116s) is often complex and documentation-intensive.

The common refrain “I already paid tax in India” is not a substitute for correct U.S. filing—Green Card holders must report worldwide income and claim credits properly to avoid double taxation and penalties.

Policy context and practical compliance priorities

• Policy posture: the U.S. taxes worldwide income of Green Card holders; India taxes income from property located in India. The treaty manages overlap but does not remove filing obligations in each country.
• U.S. cornerstone filings:
  1. Form 1040 with Schedule E for rental income.
  2. Form 1116 to claim the Foreign Tax Credit for Indian taxes actually paid.
  3. FBAR (FinCEN Form 114) if foreign accounts exceeded $10,000 in total at any time during the year.
  4. Form 8938 if foreign assets pass FATCA thresholds.
• Currency: use an IRS-recognized rate (often the yearly average) and keep a copy of the source for records.

Case study: Mr. Sharma’s Bengaluru flat

• Facts:
  • Green Card holder living in the U.S. rented his flat in Bengaluru in 2024.
  • He earned INR ₹5,10,000 in rent (about USD $6,000 at a reasonable rate).
  • Indian TDS was withheld, but he did not report the rent on his U.S. return and did not file FBAR—despite the Indian account exceeding $10,000.
• Consequences:
  • IRS discovered the omission. He must:
  1. Amend the U.S. return and report gross rent on Schedule E.
  2. Deduct eligible U.S. expenses and apply 30-year depreciation.
  3. Claim the Foreign Tax Credit on Form 1116 for Indian tax paid.
  4. File FBAR and consider Form 8938 if applicable.
  5. Face possible penalties and interest for late/underreporting.
  • India may also scrutinize expense claims and loss carry-forwards.
• Correct approach would have been:
  • Report INR ₹5,10,000 converted to USD using an IRS-accepted rate.
  • Claim applicable Schedule E deductions under U.S. rules, including depreciation.
  • Use Form 1116 to claim the Foreign Tax Credit for Indian taxes paid.
  • File FBAR and Form 8938 if thresholds were met.
  • Keep all supporting documents.

Mr. Sharma’s case is common: it’s not the money amount but the recurring pattern of assuming Indian filing alone suffices.

Practical checklist and step-by-step actions

1. Keep detailed records in both countries:
   • Rent receipts, Indian bank statements, association dues, property tax bills, repair invoices, loan interest certificates.
   • Cost basis and capital improvement ledger.
   • U.S. depreciation schedule (30-year straight-line).
2. Convert INR to USD properly:
   • Use an IRS-accepted annual average or transaction date rate as appropriate.
   • Apply the method consistently and save the rate source.
3. File the right U.S. forms on time:
   • Form 1040 with Schedule E (rental activity).
   • Form 1116 (Foreign Tax Credit) for Indian income tax actually paid.
   • FBAR (FinCEN Form 114) if Indian accounts exceeded $10,000.
   • Form 8938 if foreign asset thresholds are met.
4. Meet Indian filing duties:
   • File the Indian tax return when required.
   • Ensure tenant TDS is deducted and credited correctly.
   • Keep proof of Indian tax paid (challans, TDS certificates, receipts).
5. Plan for a future sale:
   • Track U.S. depreciation each year (affects depreciation recapture on sale).
   • Preserve evidence of capital improvements to support a higher cost basis.

Common pitfalls to avoid

• Claiming both India’s 30% standard deduction and U.S. depreciation on the same income.
• Using made-up or inconsistent currency exchange rates.
• Ignoring FBAR or Form 8938 because “the rent is small.”
• Failing to reconcile Indian TDS and Indian return filings with the U.S. Foreign Tax Credit claim.
• Letting depreciation records lapse — leading to guesswork on sale and potential recapture issues.

Organizational tips and filing rhythm

• Prepare a binder with five sections:
  1. Indian rent and TDS proofs
  2. Indian bank statements and FBAR support
  3. U.S. Schedule E ledger and depreciation worksheet
  4. Form 1116 support with exchange rate printouts
  5. Sale planning records (cost basis, improvements)
• Annual rhythm:
  • Collect rent and deposit it into an Indian account.
  • Ensure tenant provides TDS certificate when required.
  • Keep all property-related bills and receipts.
  • At year-end, total rent in INR and convert to USD using an IRS-accepted method.
  • Prepare Schedule E and Form 1116; review FBAR and Form 8938 requirements; file Indian return as needed.

Long-term planning considerations

• Residency status and timing of rent receipts can affect both countries’ treatment.
• For families who split time between countries, cross-border advice is highly valuable.
• Clean, consistent records turn a potentially stressful filing into a routine compliance task.

If you discover past mistakes

• Fix errors proactively: amend returns, file late FBARs, and provide full documentation.
• Correcting past mistakes is better than waiting; aligning filings often makes future years routine.
• Seek professional advice for multi-year cleanups, particularly where depreciation recapture or complex foreign credits are involved.

Official resources

• IRS Form 1040: About Form 1040, U.S. Individual Income Tax Return — https://www.irs.gov/forms-pubs/about-form-1040
• IRS Form 1116 (Foreign Tax Credit): About Form 1116, Foreign Tax Credit — https://www.irs.gov/forms-pubs/about-form-1116
• FinCEN FBAR (Form 114): Report of Foreign Bank and Financial Accounts (FBAR) — https://www.fincen.gov/report-foreign-bank-and-financial-accounts
• IRS Form 8938 (FATCA): About Form 8938, Statement of Specified Foreign Financial Assets — https://www.irs.gov/forms-pubs/about-form-8938
• IRS currency rates: Yearly Average Currency Exchange Rates — https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

Key takeaway: avoid the assumption “I already paid tax in India.” Green Card holders must report worldwide income, compute net rental income under U.S. rules, and claim the foreign tax credit properly. Clean records, careful currency conversion, and timely filing of Schedule E, Form 1116, FBAR, and Form 8938 where applicable keep you out of trouble and preserve treaty relief.