US Expat Taxes Explained: Filing Taxes as an American Living in India

India has been identified by multiple sources as one of the most important economies for future investments, but how does that affect your US expat taxes?  India’s position as an international IT headquarters in addition to its undeniably unique culture and beautiful geography make India an appealing location for expatriates seeking opportunity.  It is important to understand how US expat taxes change with your move to India and how India will tax you on income you earn while living there.

US Expat Taxes in India

If you are a citizen or permanent resident of the United States then you are obligated to file US taxes, in this case US expat taxes, with the IRS each year regardless of the country in which you reside.

In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.

While the US is one of the few governments that tax the international income of their citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:

• The foreign earned income exclusion allows you to decrease your taxable income on US expat taxes by the first $108,700 for 2021 ($107,600 for 2020) earned as a result of your labors while a resident of a foreign country.
• The foreign tax credit, which allows you to offset the taxes you paid in your host country with your US expat taxes dollar for dollar, and
• The foreign housing exclusion, which allows you to exclude certain household expenses that occur as a result of living abroad.

With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your US expat taxes.  Please note that even if you do not believe you will owe any US income taxes, you will more than likely still be required to file a return.

Who is a Resident of India?

Residence status is determined each fiscal year. For each fiscal year in which an individual is considered a resident, they are required to pay taxes in India.  There are three types of residency statuses:

• Resident and Ordinarily Resident (ROR) – individuals who spend more than 181 days in India in a given fiscal year and have more than 729 days in India over the past seven years.
• Resident but Not Ordinarily Resident (RNOR) – individuals who spend more than 181 days in India in a given fiscal year but have spent less than 730 days in India over the previous seven years.
• Non-Resident – individuals who spend 181 days or less in India but have earned income in India.

Tax residency in India also depends on the scope of the income tax liability.

India Income Tax Rates

Income tax rates are progressive, and applied to your income based on your residency status.

• Resident and Ordinary Resident (ROR) – Worldwide income
• Resident but Not Ordinary Resident (RNOR) – Income with is derived from India or received in India
• Non-Resident – Income derived from India or received in India

The tax rates from the Indian Ministry of Finance are as follows:

* Female residents are allowed to exclude up to 190,000 of their income from taxation.

If you are Resident and Ordinarily Resident in India (ROR), you will be taxed on worldwide capital gains.  If you are not Resident and Ordinarily Resident in India, you will only be taxed on gains derived from India.

Note that income is deemed taxable in India if it is received for services rendered in India (even if paid outside of India) or is from income or transfer of assets situated in India, irrespective of the place of receipt of the sale.

There are some allowable deductions for income, including retirement annuities, mortgage interest, education loans, and medical expenses.

US – India Tax Treaty

The US and India have a tax treaty in place which is helpful when determining which country should be paid specific taxes and at what point those taxes should be paid.  The US – India tax treaty is an expat’s guide to ensuring that taxes are paid to the right country.  If you are unsure of the language in the treaty or have any other questions, be sure to talk to a tax advisor to ensure the correct taxes are paid to the correct country.

India Tax Due Date

You should be aware that tax dates in India are different than the deadlines for US expat taxes. This means that you will need to pro-rate your income earned and taxes paid for reporting on your US expat taxes.

The tax year in India begins April 1^st and ends March 31^st of the following year.  Tax returns must be submitted with the Ministry of Finance by July 31^st.

You are required to file taxes for expats in India if your income exceeds INR 180,000 (INR 190,000 for female residents).  You will also need to file a return if you wish to exclude taxation paid to the US or other tax authorities. If you are requested by the Income Tax Department of the Ministry of Finance to submit a return, you are required to do so for the year requested.

Social Security in India

India requires expatriates working in India and Indians working abroad to pay into the mandatory statutory provident fund.  There are contributions from both employers and employees.  The contribution is a basic 12% of a taxpayer’s salary plus applicable allowances (cash equivalents).

The US does not currently have a social security agreement with India, meaning that expatriates could face double taxation on social security taxes paid on both Indian and US expat taxes.

Is Foreign Income Taxed Within India?

You will be taxed on worldwide income if you are considered Resident and Ordinarily Resident (ROR) in India.  Those with other residency statuses are only required to report income sourced in India or earned from activities occurring in India.

Other Taxes in India

In addition to income tax on salaries, there are other forms of taxation in India.

To start, there is a 12.5% value added tax (VAT) that is applied to consumer goods.  There are certain goods that have lower VAT rates (ranging from 1% to 4%).  Other goods have a higher VAT of 20%, such as alcohol and petrol.  Note that the VAT varies in each state.

You will be required to pay taxes on capital gains, including real estate or the gifts of assets, if you are considered Resident and Ordinarily Resident (ROR) in India.

Saving on US Expat Taxes

India has an economy that is growing and modernizing, and India is seen as one of best destinations for those seeking opportunity. The country’s relatively low tax rates make India an even more promising destination.  It is just as important to be aware of the tax rates, deadlines, and regulations of taxation and India as it is to keep up with your obligation to file US expat taxes.