U.S. TAX GUIDE IN INDIA

How do US citizens report their foreign business income from India to the IRS?

US citizens and Green Card holders living in India must report all foreign business income to the IRS. This involves completing Schedule C to report business income and expenses alongside Form 1040.

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Schedule C allows you to calculate your net profit by subtracting eligible business expenses from your total income. The net profit is then reported on Form 1040 as taxable income. 

Additionally, US expats earning self-employment income abroad may need to file Form 8858, which details the activities of foreign disregarded entities. 

Not filing this form properly can result in significant penalties, starting at US$10,000.

How can US expats lower their tax liability while living in India?

Restructuring your business into a private limited company in India is one way to reduce your US tax liability. By operating through an Indian corporation, your income is taxed at corporate tax rates in India, which can be lower than US self-employment tax.

In this structure, your earnings are treated as corporate profits rather than self-employment income. This approach eliminates US self-employment tax obligations and provides access to India-specific corporate tax benefits, potentially resulting in overall tax savings.

What is Form 5471, and why is it important for US expats?

US citizens who own more than 10% of a foreign corporation, such as an Indian private limited company, must file Form 5471 with the IRS. This form reports the financial activities of the foreign corporation, including profits, distributions, and shareholder details.

The Tax Cuts and Jobs Act (TCJA) introduced new rules that require US expats to pay US taxes on all profits from foreign corporations they control, even if the profits are not distributed. Filing Form 5471 ensures compliance with these regulations and helps avoid steep penalties.

How does the high tax exemption prevent double taxation?

The high tax exemption protects US expats from being taxed twice on foreign corporate income. If the foreign country’s corporate tax rate is at least 90% of the US corporate tax rate, no additional US corporate tax is owed.

Since India’s corporate tax rate is typically around 30%, well above the exemption threshold of 18.9% (90% of the US corporate tax rate of 21%), most expats with Indian corporations do not owe extra US corporate taxes on profits kept within the company.

What challenges come with filing Form 5471 for Indian corporations?

Filing Form 5471 can be complex, as it requires detailed financial information, including:

  • A balance sheet showing assets and liabilities.
  • Profit and loss statements.
  • Shareholder ownership details.


These requirements often necessitate professional assistance to ensure accurate and timely filing. Mistakes or delays can result in substantial fines.

Should US expats establish Indian corporations to manage taxes?

Setting up a private limited company in India can significantly reduce US tax obligations. Key advantages include:

  • Avoiding US self-employment tax.
  • Benefiting from India’s corporate tax rates.
  • Leveraging the high tax exemption to prevent double taxation.


However, forming and maintaining a corporation involves administrative costs and compliance responsibilities, such as filing Form 5471 annually. US expats should evaluate whether the benefits outweigh the challenges.

What additional tax responsibilities do self-employed expats face in India?

  • FBAR and FATCA compliance: If your foreign bank accounts exceed US$10,000 during the year, you must file an FBAR. For higher-value assets, you may also need to file Form 8938 under FATCA.
  • Quarterly estimated taxes: Self-employed expats must make quarterly estimated tax payments to the IRS to cover income and self-employment taxes. Missing these payments can lead to penalties and interest.
  • Social security contributions: Without a Totalization Agreement between the US and India, expats may need to pay social security taxes in both countries.

How can tax planning help US expats manage dual taxation?

Strategic tax planning can help minimize the impact of dual taxation. Recommended strategies include:

  • Using the Foreign Earned Income Exclusion (FEIE) to exclude up to US$130,000 of foreign-earned income from US taxes.
  • Applying the Foreign Tax Credit (FTC) to offset US income taxes with taxes paid in India.
  • Consulting a tax professional with expertise in US and Indian tax laws to optimize filings and avoid penalties.