1. The Fundamental Conflict
The core challenge arises because the two countries define "taxable persons" differently. This section breaks down how your status changes depending on which government is looking at you.
United States Perspective
The U.S. follows Citizenship-Based Taxation.
- ➤ Taxed on Worldwide Income regardless of residence.
- ➤ Must file Form 1040 annually even if living in India.
- ➤ Subject to global estate and gift tax laws.
India Perspective
India follows Residence-Based Taxation.
- ➤ NRIs are taxed only on India-Sourced Income.
- ➤ Foreign income (US salary) is generally tax-free in India.
- ➤ Status is determined by days present in India (182+ days usually triggers residency).
Double Taxation Avoidance Agreement (DTAA)
While you are taxed twice in theory, the DTAA (Article 3 of the report) provides relief mechanisms. Most commonly, you use the Foreign Tax Credit (FTC) on Form 1116 to offset US tax with taxes already paid in India.
2. Income Stream Analyzer
Different types of income are treated differently. Select a source below to see the specific tax implications for both countries.
3. The "Danger Zone": PFIC & Reporting
This section highlights the most common and costly mistakes mentioned in Articles 4, 5, and 8. Failure to comply here can lead to severe penalties or confiscatory tax rates.
The Mutual Fund Trap (PFIC)
Indian Mutual Funds are classified as Passive Foreign Investment Companies (PFIC) by the IRS. They do NOT get capital gains treatment. They are taxed at the highest marginal rate + interest.
*Hypothetical comparison of $10k gain over 5 years.
Mandatory Reporting Thresholds
Did your aggregate foreign accounts exceed $10,000 at any point?
Threshold: $10,000 Aggregate
Do you have specified foreign assets (stocks, pensions) above the limit?
Threshold: $50k (Single) / $100k (Joint) *Higher for expats
4. Selling Indian Real Estate
Selling property in India involves a complex interplay of Indian TDS (Tax Deducted at Source) and US Capital Gains reporting. (Article 6)
1. The Sale & TDS
Buyer deducts TDS (usually 20-30%) before paying you. This is NOT your final tax, but a withholding.
2. Determine Gain (Difference)
India: Long-term if held > 24 months. Indexation allowed.
US: Long-term if held > 1 year. NO indexation allowed (calculated on raw cost basis).
3. Claiming Credit
Report full gain on US Form 1040. Use Form 1116 to claim credit for the TDS/Tax paid in India to avoid double taxation.
Tax Impact Simulation
Notice how the "TDS" often covers a large chunk of the US liability.
Estate & Gift Tax (Article 7)
Often overlooked until it's too late.
Worldwide Assets
US Estate Tax applies to your GLOBAL assets, including that ancestral home in India.
Gifting to Indians
Gifts to Indian relatives may trigger US Gift Tax reporting (Form 709) if over the annual exclusion limit ($17k+).
Inheritance
Proper estate planning (Wills/Trusts) is crucial to avoid legal disputes and unexpected tax liabilities for heirs.