U.S. TAX GUIDE IN INDIA
What should US citizens in India understand about local social security and savings accounts?
If you are a US citizen or Green Card holder based in India, you must report any income tied to Indian retirement plans like the Employee Provident Fund (EPF) or Public Provident Fund (PPF) on your US tax return.
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The US taxes worldwide income, so even though India may not tax these accounts until withdrawal, the IRS still expects you to disclose them.
Some Indians enjoy tax benefits on these plans at home, but the US approach can differ, particularly regarding interest and distribution rules.
Failing to report an account that goes above set thresholds can incur penalties, so it is important to keep track of your EPF or PPF balances.
How do EPF withdrawals affect US taxes for expats?
The EPF involves both employer and employee contributions, with the funds growing tax-free in India until you withdraw them. Once you take that money out, you owe tax in India, and you must also report the withdrawal on your US tax return.
You can claim a Foreign Tax Credit (FTC) to reduce your US tax if you have already paid in India. You may also have to file Form 8938 if your total foreign assets surpass US limits and the FBAR if your accounts exceed US$10,000 at any time.
Why does the PPF create different tax obligations under US Rules?
India does not tax the PPF’s interest or the eventual withdrawal, making it an attractive option locally. However, the IRS treats the annual interest as taxable.
You must declare that interest on your US return each year, and since India does not tax it, there is no foreign tax credit available. This mismatch can lead to an extra US tax bill.
Though the PPF offers a secure interest rate and tax benefits in India, US expats might find it less appealing when they realize the annual interest is fully taxable on their American return.
Does the US-India tax treaty address Indian retirement plans?
The treaty generally prevents double taxation of social security or pension-style payments. Under Article 20, certain Indian government pensions may be taxed only by India, while other payments can be taxed only by the US.
The treaty’s aim is to avoid having both countries tax the same retirement income.
Still, whether the EPF or PPF benefits from treaty protection depends on factors like how the account is classified and whether it qualifies as a form of social security. If it does not, the normal US tax rules apply.
Are EPF contributions more advantageous than PPF for US citizens?
Many salaried employees in India must pay into the EPF, and because India taxes EPF distributions when you withdraw them, you can typically use the FTC on your US return. That means you often escape double taxation.
Meanwhile, the PPF may cause a yearly US tax charge on the interest since it is not taxed in India. For this reason, a lot of expats prefer the EPF to the PPF.
While some still maintain a PPF for local financial planning, it’s important to remember that the IRS sees the interest as annual income.
Which reports and forms do US expats need for these Indian accounts?
Depending on your specific circumstance, the forms required may be even more.
- FBAR (FinCEN Form 114) if the total of all foreign accounts goes above US$10,000 at any point.
- Form 8938 if total foreign assets exceed US$50,000 for those residing in the US or US$200,000 for those living abroad.
- Form 1040 to list any EPF withdrawals or annual interest from the PPF.
What makes these retirement plans tricky for US expat filers?
India’s fiscal year is April to March, but the US uses a January to December cycle. That difference can complicate how you count interest or reported withdrawals. Indian rules often treat the EPF and PPF as tax-friendly, while the US might categorize or tax them differently.
How can a tax advisor assist with cross-border EPF or PPF reporting?
Working with a professional who knows both US and Indian taxation provides clarity on:
- Calculating annual interest for PPF and adding it to your US income.
- Applying the Foreign Tax Credit if EPF withdrawals were taxed in India.
- Coordinating currency exchange rates and dealing with mismatched tax years.
- Checking whether the US-India treaty grants specific exemptions for government or pension-like funds.
- Ensuring that you file all required forms, preventing unnecessary fines.