Pillar guide · Last updated September 3, 2026 · Reviewed against India Finance Act 2025 + IRS Tax Year 2025/2026 rules.
NRI taxation is one of the highest-search queries in Indian diaspora finance because it combines two of the most complex tax systems in the world — India's (with its residence-based classification and multiple account types) and the US's (with its worldwide-income reach and disclosure regime). This pillar is the complete framework for Indian citizens abroad and their Indian tax exposure, US-side tax obligations, and how to combine the two through the DTAA.
Below covers: NRI residence status under Indian income tax law, the NRE / NRO / FCNR account choices, DTAA (Double Taxation Avoidance Agreement) between India and the US/UK/Canada/UAE/Singapore, Indian income tax filing rules for NRIs, US tax rules for Indian expats (Substantial Presence Test, RNOR window), the FBAR and Form 8938 disclosure regime, PFIC problem with Indian mutual funds, and the specific tactical moves that reduce combined tax burden.
Indian Residence Status — The Foundation
Whether Indian tax applies to your global income depends on residence classification under Section 6 of the Income Tax Act:
- Resident and Ordinarily Resident (ROR): Global income taxable in India. Applies to Indian residents (365+ days in India in prior 4-year period, plus 730+ days in prior 7 years).
- Resident but Not Ordinarily Resident (RNOR): Only India-source income + income received in India taxable. This is a two-year "transition" status typically applies to returning NRIs.
- Non-Resident (NRI): Only India-source income + income received in India taxable in India. Foreign salaries, rentals, capital gains are outside Indian tax net.
NRI test: less than 182 days in India in the current tax year AND less than 365 days in India in the prior 4 tax years. Simpler test for most H-1B / permanent NRIs abroad: if you've been outside India most of the year, you're NRI.
NRE vs NRO vs FCNR Accounts
| NRE | NRO | FCNR | |
|---|---|---|---|
| Deposit source | Foreign income only | Any (foreign or India-source) | Foreign income only |
| Currency | INR | INR | Foreign (USD/GBP/EUR/etc.) |
| Interest taxability in India | Tax-free | Taxable (30% + surcharge for NRIs) | Tax-free |
| Repatriability | Fully repatriable | Limited to $1M/yr under LRS | Fully repatriable |
| Joint holder | NRI only (or ROR resident with due precautions) | Anyone (NRI or resident) | NRI only |
| Best for | Salary + investment funds from abroad | Rental income from India property, dividends from Indian securities | USD held long-term, hedge against INR depreciation |
DTAA — The Double Tax Avoidance Agreement
India has DTAA treaties with most countries where NRIs live. The two most-used mechanisms:
- Tax credit method: Pay tax in the source country, claim credit in residence country. US-India DTAA follows this.
- Exemption method: Income taxed in only one country. UK-India DTAA has some exemption elements.
Common DTAA rates (India-side withholding on payments to NRIs):
- Interest income: 15% (US), 15% (UK), 10% (UAE — but Indian rate lower on dividends)
- Dividends: 25% India-USA (post-2020 changes)
- Royalties: 15% (US), 15% (UK)
- Capital gains: mostly follow source-country rules
Claim DTAA benefits by filing Form 10F + Tax Residency Certificate (TRC) from your country of residence with the Indian tax authority annually.
Indian Tax Filing for NRIs
NRIs with Indian income must file Indian income tax returns (ITR-2 is typical) by:
- July 31, 2026: Regular deadline for individuals not requiring audit (most NRIs).
- September 30 / October 31, 2026: Extended deadline for cases requiring statutory audit (business income > ₹1 crore turnover).
Filing threshold: If India-source income exceeds ₹2.5 lakhs (basic exemption), filing is required. Even below threshold, filing is often recommended to claim TDS refunds.
US Tax Rules for Indian Expats in the US
Substantial Presence Test
You are a US resident for tax purposes if you meet either the Green Card test OR the Substantial Presence Test:
- 31+ days in the US in the current year, AND
- 183+ days over a 3-year period, weighted:
- Days in current year: full count
- Days in first prior year: 1/3 weight
- Days in second prior year: 1/6 weight
H-1B / L-1 workers typically meet the SPT within their first year and become US tax residents on worldwide income.
Foreign Tax Credit vs Foreign Earned Income Exclusion
Foreign Tax Credit (Form 1116): Claim credit for foreign taxes paid on foreign income. Best for high foreign tax jurisdictions.
Foreign Earned Income Exclusion (Form 2555): Exclude up to ~$120,000/year of foreign earned income. Requires bona-fide-resident or physical-presence test. Not typically useful for H-1B in US (US-source income).
FBAR + Form 8938 — Disclosure Regime
FBAR (FinCEN Form 114): If total foreign account balances exceed $10,000 at any point during the year, report ALL foreign accounts. Filed with FinCEN, not IRS. Due April 15 (auto-extended to October 15).
Form 8938: Additional IRS reporting for higher balances ($50K single / $100K joint threshold for US-resident filers). Filed with Form 1040.
Penalties are severe. Non-willful FBAR failure: up to $10,000 per violation. Willful: greater of $100,000 or 50% of account balance. These are per-account, per-year penalties.
The PFIC Problem — Indian Mutual Funds Are Traps for US Investors
Under US tax law, an "Indian mutual fund" (any Indian pooled investment) is classified as a Passive Foreign Investment Company (PFIC) for US tax purposes. PFIC treatment is punitive:
- Deferred taxation with punitive interest on gains held longer than one year.
- Additional annual reporting (Form 8621 per fund per year).
- Effective tax rate on gains can exceed 50% after accumulated interest charges.
Practical advice for H-1B / Green Card holders: Do NOT hold Indian mutual funds while a US tax resident. Sell before Substantial Presence Test triggers, or convert to Indian stocks + FDs which are not PFICs.
Tactical Moves for Combined Tax Reduction
- Time your India entry / exit — If moving to/from India in mid-year, plan around the 182-day residence line.
- Use RNOR status — 2-year RNOR window after returning to India excludes foreign income from Indian tax. Time asset sales during this window.
- Prefer NRE over NRO when possible for tax-free Indian interest.
- Use FCNR for USD-denominated deposits — no FX conversion loss.
- Avoid Indian mutual funds while US-resident — PFIC trap.
- Consider GIFT City AIF for large diaspora investments — some tax advantages, still emerging regulatory landscape.
Frequently Asked Questions
Am I an NRI or Indian resident for tax purposes? Depends on days in India. Less than 182 days per year AND less than 365 days in prior 4 years = NRI.
Do I have to file Indian taxes as an NRI? Only if you have Indian-source income above ₹2.5 lakh. Otherwise voluntary.
Is my US salary taxed in India? No, as NRI. Only India-source income is taxed in India.
Is my Indian rental income taxed in the US? Yes, if you're a US tax resident. But you can claim Foreign Tax Credit for Indian taxes paid on that rental.
Can I hold Indian stocks as an H-1B? Yes. Indian stocks are NOT PFICs and are fine to hold. Indian mutual funds ARE PFICs and should be avoided.
Do I need to report my NRE / NRO account on FBAR? Yes if aggregate foreign balance exceeded $10K at any point during the year.
What's the tax on selling Indian property as an NRI? Capital gains tax in India (20% long-term with indexation, 30% short-term). Buyer must deduct TDS at 20%/30% depending on holding period. US resident: additional US tax owed with foreign tax credit for Indian tax paid.
Companion Reading
- US NRI Money & Compliance Hub 2026
- NRI Annual Compliance Calendar 2026
- Sending Money to India 2026 — Pillar #8
- NRI Tax Filing 2026 — Deadlines + RNOR
Official Sources
- Income Tax Department India — incometaxindia.gov.in
- IRS Form 8621 (PFIC) — irs.gov/forms-pubs/about-form-8621
- FinCEN FBAR — bsaefiling.fincen.treas.gov
- DTAA texts — incometaxindia.gov.in/pages/international-taxation/dtaa.aspx
This pillar is a comprehensive overview of Indian + US taxation for NRIs as of September 3, 2026. Tax rules change annually via Finance Act (India) and IRS updates. This is informational content, not tax advice. Consult a CPA with cross-border expertise. Reviewed and updated monthly.