If you’re an Indian national living in the US, chances are you’re juggling money across borders — a salary in the States, a flat in Hyderabad that earns rent, maybe even mutual funds or FDs back home.
And here’s where it gets tricky: both the IRS and the Indian Income Tax Department think they deserve a slice of your pie.
So how do you play fair — without overpaying or getting into compliance chaos?
Let’s break it down like MyTaxFiler clients like it — straightforward, practical, and worth your time.
The Double Income Dilemma
You earn in two countries. You love it. But so do two tax departments.
That means:
- You’re earning in two currencies.
- You might qualify as a resident in both places.
- You could get taxed twice on the same income if you don’t claim treaty relief.
Sounds complicated? It is — but it’s manageable once you understand who gets to tax what and how to claim credit.
Let’s start with residency, because that’s what decides who has first dibs on your income.
Residency Rules: Who Owns You, Tax-Wise?
In the US
You’re a tax resident if you meet the Substantial Presence Test.
That means you spent 183 days or more in the US (counting part of the previous two years).
Once you qualify — boom — you’re taxed on worldwide income.
In India
Under Section 6 of the Indian Income Tax Act, 182 days in India makes you an Indian tax resident too.
And here’s the problem: if you split your year between the US and India, both countries may call you a “resident.”
Enter: The Tie-Breaker Rule
The US–India Double Taxation Avoidance Agreement (DTAA) has a set of “tie-breakers”:
- Where’s your permanent home?
- Where are your personal and economic ties stronger?
- Where do you habitually live?
Whichever country ticks more of those boxes gets taxing rights on your global income. The other must give you a foreign tax credit (more on that below).
What the IRS and Indian IT Dept Expect from You
If you think “I’ll just file in one country,” sorry — that’s not how this works. Both systems expect compliance.
On the US side
- File Form 1040 reporting everything you earned worldwide.
- Claim credit for Indian tax paid using Form 1116.
- Declare foreign accounts via FBAR (FinCEN 114) and Form 8938 (FATCA).
On the Indian side
- File ITR-2 or ITR-3 depending on your income type.
- Report your US income if you’re an Indian resident.
- Claim the US tax you paid as credit using Form 67.
- Attach Schedule FA for any US assets you own.
If you skip either side, the mismatch shows up fast. Both tax authorities share data under FATCA and CRS agreements.
The Hero of the Story: The US–India Tax Treaty
Think of the DTAA as the peace treaty that keeps you from being taxed twice for the same income.
It says:
- If income is taxed in one country first, the other gives credit.
- Each country has exclusive rights for certain income types (for example, salary from government service or student stipends).
- It includes special clauses for students, consultants, and researchers.
Basically — the treaty is your best friend. Use it, don’t ignore it.
The Most Powerful Tool You’re Not Using: Foreign Tax Credit
Here’s where most people go wrong:
They pay tax in India, then pay full tax again in the US — not realizing they can offset one against the other.
If you paid ₹2,00,000 in Indian tax on rent, you can claim that amount as a dollar-equivalent credit against your US taxes (using Form 1116).
If you paid $5,000 in US tax on your salary, you can claim that in India (using Form 67).
You’re not avoiding tax. You’re just not paying twice.
Pro tip: Keep every TDS certificate, tax payment challan, and proof of income handy. You’ll need them to prove taxes were actually paid.
Real-Life Scenarios (Because Theory Is Boring)
Case 1: Salary in the US + Rent in India
You work for Amazon in Seattle and own a flat in Pune.
- Report the rent in your US return.
- Pay Indian tax on it (since it’s India-sourced).
- Claim that Indian tax as a foreign tax credit in the US.
Net effect: You’re not taxed twice.
Case 2: Consulting Income in India + Investments in the US
You freelance for Indian clients while living in New York.
- Income is taxable in both places.
- India taxes it because it’s sourced there; the US taxes it because you’re resident.
- Use Form 1116 to offset Indian tax against your US liability.
- Keep invoices and currency conversion records from the US Treasury rates.
Case 3: Indian Student in the US
Under Article 21(2), Indian students temporarily in the US can claim the standard deduction even on scholarships or assistantships — something most don’t know!
Common Mistakes That Cost Thousands
Assuming India doesn’t care because you live abroad.
NRIs still owe tax on Indian income.
Using the wrong exchange rate for income conversion.
Always use official Treasury yearly rates.
Missing Form 67.
No Form 67 = No foreign tax credit in India.
Forgetting state taxes.
California and New Jersey don’t recognize foreign credits or treaties fully.
Thinking “I’ll deal with it later.”
Late FBAR or FATCA penalties can hit $10,000 per account.
The Smarter Way: Plan, Don’t React
Cross-border tax planning isn’t just compliance — it’s strategy.
Done right, it helps you:
- Avoid double taxation
- Optimize cash flow
- Make investments across both markets efficiently
- Stay worry-free when tax notices roll out in two inboxes
Ready to optimise your finance and maximise your savings? Book a Tax Planning Consultation with MyTaxFiler today.