India-US Tax Services: Income and Assets in Both Countries

Two different questions, and the answers do not track each other

Almost every cross-border mistake we unwind comes from treating one question as though it answered the other. They are independent, and a single holding can trigger either, both, or neither.

The first question is whether the thing has to be DISCLOSED — listed on a form, described, valued. The second is whether income arising on it is TAXABLE, and if so when. Disclosure is about existence; tax is about income. Filing a disclosure form does not report any income, and reporting income does not satisfy a disclosure requirement.

• An Indian property you own outright is not a financial account, so it is not disclosed as one — but the rent it produces is taxable income, and the bank account the rent lands in is disclosable.
• A resident savings account you left open in India with a small balance may be disclosable purely because disclosure tests look at your accounts in aggregate, while the interest on it is a trivial amount of taxable income.
• Indian mutual fund units raise a reporting obligation of their own, separate from the account they are held through, and the taxing rules that go with them are the harshest in this area.
• Tax already paid in India is neither a disclosure nor income — it is a credit, and it does nothing at all unless it is claimed on the return.

The practical consequence: a preparer who asks only "what income did you have?" will produce a return that is missing forms, and a preparer who asks only "what accounts do you hold?" will produce disclosures with untaxed income behind them. Both questions have to be asked separately, which is why our intake does.

What each Indian holding creates on a US return

This is the routing table for everything below. It says which questions a holding raises, not how to answer them — each guide linked from this page carries the detail, the thresholds and the primary sources for its own topic.

Two rows deserve their qualification repeated rather than buried. The provident fund row is unsettled on the tax question, not on the reporting question: nobody seriously disputes that the balances are reportable, while how contributions and annual accretion should be treated on a US return has no single authoritative answer, and the India-US treaty contains no article that plainly defers it. We set out the competing positions and where the uncertainty sits rather than assert one.

The gift row is the one people get backwards. Receiving a gift or an inheritance is not income to a US recipient and changes your tax by nothing. What it can create is a reporting obligation, and that obligation follows the recipient — so the family member in India who sent the money has no US filing to make, and you may.

Why the Indian numbers cannot be copied across

India runs a financial year from April to March and the US runs a calendar year. Nothing reconciles them for you, and this is where cross-border returns most often stop tying up.

The effect is that no Indian document covers a US tax year. Form 16, Form 26AS and the Annual Information Statement each describe a period that straddles two US years, so figures taken from them have to be apportioned before they can go on a return rather than transcribed. The same applies in reverse when your Indian CA needs US figures.

Currency is the second restatement. A US return is prepared in dollars, so rupee amounts are converted — and which rate applies depends on what is being converted and why, with the rate used for a disclosure form not necessarily the rate used for an income item. For an asset held over time, the movement between the rate at acquisition and the rate at disposal sits inside the US gain, which is why an Indian asset can show a rupee gain and a dollar loss, or the reverse, and both figures are correct on their own terms.

A third mismatch is more subtle and catches careful filers: Indian tax deducted at source is not automatically the amount creditable in the US. If your Indian return refunds part of it, the creditable figure is what you actually bore, not what was withheld — so the Indian assessment and the US credit are linked, and doing them in the wrong order can mean claiming a credit you later have to correct.

This is the reason both filings are better prepared against one set of facts. The Indian return is evidence about the US return and the US return is evidence about the Indian one, and when two firms prepare them independently the two sets of numbers are reconciled by nobody.

Relief exists, and none of it is automatic

Reporting Indian income on a US return does not mean paying full US tax on top of full Indian tax. Two mechanisms prevent that, and both have to be claimed on the return with the working behind them.

The foreign tax credit is the one that does most of the work. It credits Indian tax you have borne against your US liability on the same income. It is limited, and the limit is computed separately by category of income, which is why it often reduces rather than eliminates the US tax and why the categorisation matters as much as the total. Unused credit is not simply lost — there are carryback and carryforward positions — but they only exist if the credit was computed in the first place.

The India-US treaty then addresses what the credit does not: which country has the primary right to tax a particular class of income, and in a narrow set of cases whether it is taxable in the US at all. Treaty positions turn on facts, are claimed on the return with the article identified, and in some circumstances have to be disclosed separately.

There is one asymmetry worth stating plainly because it surprises people and it runs the opposite way to intuition: where India exempts an income stream, no Indian tax has been paid on it, so there is nothing to credit — and the US taxes it in full. An exemption on the Indian side can therefore leave you worse off in the US than a taxed equivalent would. That is not a loophole to be closed or an error to be corrected; it is how the credit works, and it is a reason to know which of your Indian income is exempt before the year ends rather than after.

Where this comes from

• IRS — Taxation of US residents: worldwide income, and which return applies
• FinCEN — Report of Foreign Bank and Financial Accounts (FBAR), the filing itself and who must make it
• IRS — About Form 8938, Statement of Specified Foreign Financial Assets
• IRS — About Form 8621, the return required of a shareholder in a passive foreign investment company
• IRS — About Form 1116, Foreign Tax Credit, including the per-category limitation
• IRS — India tax treaty documents: the convention text and technical explanation
• IRS — About Form 3520, reporting gifts and bequests received from a foreign person
• IRS — Foreign currency and currency exchange rates, for converting rupee figures
• IRS — About Schedule E (Form 1040), Supplemental Income and Loss, used for rental income