U.S. TAX GUIDE IN INDIA
How can US expats living in India reduce double taxation through tax credits and exclusions?
For US citizens residing in India, a key challenge is avoiding double taxation—paying taxes to both the Indian government and the US IRS. Fortunately, there are provisions available, particularly the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC), that can significantly reduce this burden.
Table of Contents
What is the Foreign Earned Income Exclusion (FEIE), and who can benefit from it?
The Foreign Earned Income Exclusion (FEIE) allows US expats to exclude up to US$130,000 of foreign-earned income from US taxation for the 2025 tax year. The FEIE specifically targets earned income, which includes wages and self-employment income. It does not apply to other forms of income, such as dividends, rental income, or capital gains.
To qualify for the FEIE, an individual must satisfy one of the following criteria:
- Physical Presence Test: This means you need to be physically present in a foreign country, like India, for at least 330 full days within any consecutive 12-month period.
- Bona Fide Residence Test: You must establish that you are a bona fide resident of a foreign country for a full tax year. This option suits expats who have moved to India long-term and have integrated into the community.
How does the Foreign Tax Credit (FTC) help offset US tax liability?
The Foreign Tax Credit (FTC) is another important tool for US expats to avoid double taxation. It allows US citizens to claim a credit for taxes paid to the Indian government on income that is also subject to US tax. The FTC can be used if your foreign-earned income exceeds the FEIE threshold or for income that is not eligible for the FEIE, such as investment income.
The FTC reduces your US tax liability by providing a dollar-for-dollar reduction for the amount of foreign taxes paid. For example, if your Indian tax rate is 30% and the US rate on the same income is 35%, the FTC can help offset most of your US tax liability.
Can you combine the FEIE and the FTC?
Yes, you can use both the FEIE and the FTC together, but not for the same income. You can apply the FEIE to exclude up to US$130,000 of earned income and then use the FTC to offset taxes on any remaining income or other forms of income like rental earnings or investment returns.
For instance, if you earn US$150,000 in a year, the FEIE can be applied to the first US$130,000, and the FTC can be used to reduce the tax burden on the remaining US$20,000. It’s important to note that using the FEIE does not prevent you from accessing other deductions or credits, such as the Child Tax Credit or standard deductions, if you qualify.
How does the US-India tax treaty protect US expats from double taxation?
The US-India tax treaty plays a significant role in preventing double taxation by defining which country has the primary right to tax specific types of income.
The treaty covers areas like pensions, dividends, royalties, and other financial streams to ensure that taxpayers aren’t taxed twice on the same income.
While the treaty can help allocate taxing rights, it does not exempt US citizens or Green Card holders from their obligation to file US tax returns.
To claim treaty benefits, such as reduced rates of taxation on certain income, you may need to file Form 8833 with the IRS.
What options exist for expats who missed filing their US taxes or FBARs?
If you missed filing requirements for tax returns, FBAR (Foreign Bank Account Report), or FATCA forms, the IRS offers the Streamlined Filing Compliance Procedures, which are available to taxpayers who have unintentionally failed to file required documents.
The Streamlined Procedures allow US expats to catch up on their tax filings without incurring severe penalties, provided they can certify that their non-compliance was not intentional. This program is especially beneficial for those who genuinely did not realize they had ongoing US tax obligations.
What are the consequences of not meeting US tax obligations as an expat?
Failure to accurately file taxes or to meet filing requirements such as the FBAR can lead to significant repercussions. The IRS may impose fines of up to US$10,000 per unfiled form, especially if they determine non-compliance was willful.
In extreme cases, repeated non-compliance can lead to severe actions, such as asset freezes or criminal charges.
What proactive steps can US expats take to stay compliant?
- Set Reminders for Tax Deadlines: Make sure you’re aware of the filing dates for your US tax return, FBAR, and any other forms.
- Organize Your Financial Records: Keeping records of income, bank account balances, and tax payments throughout the year makes the filing process smoother.
- Consider Software Tools and Professional Help: Using tax software specifically tailored for expats or consulting with a professional annually will help you stay up-to-date with any new regulatory changes that may impact your obligations.