Taxes for US Expats Living in India

India is a colorful country with a rich culture and ancient traditions. Economically, India has become a powerhouse in certain industries (e.g., IT, business process outsourcing).

If you are planning to become a U.S. expat in India, or have been one for a while, it’s important to know the tax laws of the country and the potential impact on your U.S. tax return. Expat taxes can get complicated. Fortunately, the key points are outlined below.

Photo by: McKay Savage

Taxation in India

Let’s begin by discussing who is required to pay taxes in India. There are 2 categories of residents:

• Resident: 182 days or more in India during tax year and 730 days or more during past 7 tax years; and
• Not-ordinarily resident: 182 days or more in India during tax year, but less than 730 days during past 7 tax years.

Residents are taxed on worldwide income. Not-ordinarily residents and non-residents are taxed on India-source income only.

For 2013, the applicable income tax rates are:

• Employment Income: Progressive up to 30%
• Interest Income: Withholding of 10%
• Dividends: Not taxable to individual if from a domestic company
• Capital Gains: Depends on whether gains are short-term or long-term.

India and the U.S. have an income tax treaty in-place. International tax treaties clarify tax jurisdiction. These treaties can provide U.S. citizens and residents with reductions in foreign income taxes. However, a reduction in U.S. taxes is generally not available under these treaties as a result of “tax saving” clauses that allow the U.S. government to impose taxes on U.S. expats as if there were no treaty.

Note that India and the U.S. do not have a social security tax agreement in-place. This means that certain U.S. expats will be required to pay into both social security programs.

How Living in India Impacts US Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in India. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in India with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

FATCA and India

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 80 countries have either signed intergovernmental agreements with the United States or are in discussions. It is important to know that India does have a FATCA agreement in-place with the U.S.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.