How Living and Working in India Impacts Taxes for US citizens
India has been identified by multiple sources as one of the most important economies for future investments, but how does that affect your US expat taxes? India’s position as an international IT headquarters in addition to its undeniably unique culture and beautiful geography make India an appealing location for expatriates seeking opportunity. It is important to understand how US expat taxes change with your move to India. Also, you’ll need to learn about Indian taxes for US citizens who earn income while living there.
US Expat Taxes in India
If you are a citizen or permanent resident of the United States then you are obligated to file US taxes with the IRS each year no matter what country you live in. And in addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with FinCEN Form 114.
While the US taxes the international income of its citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:
- The Foreign Earned Income Exclusion, which allows you to exclude up to $105,900 of foreign earned income from your 2019 US taxes and $107,600 from your 2020 taxes
- The foreign tax credit, which allows you to offset the taxes you paid in your host country with your US expat taxes dollar for dollar
- The Foreign Housing Exclusion, which allows you to exclude certain household expenses that occur as a result of living abroad
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your US expat taxes. Please note that even if you do not believe you will owe any US income taxes, you will more than likely still be required to file a return.
To learn more about your tax obligations while living in India, download our guide: 25 Things You Need to Know About US Expat Taxes.
Who is a Tax Resident of India?
Residence status is determined each fiscal year. For each fiscal year in which a US citizen is considered a resident, you’ll be required to pay Indian taxes.
In India, there are three types of residency statuses:
- Resident and Ordinarily Resident (ROR) – individuals who spend more than 181 days in India in a given fiscal year and have more than 729 days in India over the past seven years.
- Resident but Not Ordinarily Resident (RNOR) – individuals who spend more than 181 days in India in a given fiscal year but have spent less than 730 days in India over the previous seven years.
- Non-Resident – individuals who spend 181 days or less in India but have earned income in India.
Tax residency in India also depends on the scope of the income tax liability.
Indian Income Tax Rates for US Citizens
Income tax rates are progressive, and applied to your income based on your residency status.
- Resident and Ordinary Resident (ROR) – Worldwide income
- Resident but Not Ordinary Resident (RNOR) – Income with is derived from India or received in India
- Non-Resident – Income derived from India or received in India
The tax rates from the Indian Ministry of Finance for 2013-14 are as follows:
|Earnings in Indian Rupee (INR)||Rate Applicable to Income Level (%)|
|250,001 – 500,000||5% of total income exceeding 2,50,000|
|500,001 – 1,000,000||12,500 + 20% of total income exceeding 500,000|
|1,000,001 and above||112,500 + 30% of total income exceeding 1,000,000|
If you are Resident and Ordinarily Resident in India (ROR), you will be taxed on worldwide capital gains. If you are not Resident and Ordinarily Resident in India, you will only be taxed on gains derived from India.
Note that income is deemed taxable in India if it is received for services rendered in India (even if paid outside of India) or is from income or transfer of assets situated in India, irrespective of the place of receipt of the sale.
There are some allowable deductions for income, including retirement annuities, mortgage interest, education loans, and medical expenses.
How the US-India Tax Treaty Protects Expats
The US and India have a tax treaty in place which is helpful when determining which country should be paid specific taxes and at what point those taxes should be paid. The US – India tax treaty is an expat’s guide to ensuring that taxes are paid to the right country. If you are unsure of the language in the treaty or have any other questions, be sure to talk to a tax advisor to ensure the correct taxes are paid to the correct country.
Indian Tax Due Date
You should be aware that tax dates in India are different than the deadlines for US expat taxes. This means that you will need to pro-rate your income earned and taxes paid for reporting on your US expat taxes.
The tax year in India begins April 1st and ends March 31st of the following year. Tax returns must be submitted with the Ministry of Finance by July 31st.
US citizens working in India are required to file Indian taxes if your income exceeds INR 250,000. You will also need to file a return if you wish to exclude taxation paid to the US or other tax authorities. If you are requested by the Income Tax Department of the Ministry of Finance to submit a return, you are required to do so for the year requested.
Social Security in India
India requires expatriates working in India and Indians working abroad to pay into the mandatory statutory provident fund. There are contributions from both employers and employees. The contribution is a basic 12% of a taxpayer’s salary plus applicable allowances (cash equivalents).
The US does not currently have a social security agreement with India, meaning that expatriates could face double taxation on social security taxes paid on both Indian and US expat taxes.
Is Foreign Income Taxed in India?
You will be taxed on worldwide income if you are considered Resident and Ordinarily Resident (ROR) in India. Those with other residency statuses are only required to report income sourced in India or earned from activities occurring in India.
Other Taxes in India for US Citizens
In addition to income tax on salaries, there are other forms of Indian taxes that US citizens should know.
To start, India applies a value added tax (VAT) to consumer goods that typically ranges from 12% to 15%. Certain goods that have lower VAT rates. VAT varies by state in India.
You will be required to pay taxes on capital gains, including real estate or the gifts of assets, if you are considered Resident and Ordinarily Resident (ROR) in India.
Saving on US Expat Taxes
India has an economy that is growing and modernizing, and India is seen as one of best destinations for those seeking opportunity. The country’s relatively low tax rates make India an even more promising destination.
Questions About Your US Expat Taxes in India?
It is just as important to be aware of the tax rates, deadlines, and regulations of taxation and India as it is to keep up with your obligation to file US expat taxes. Here are some important dates to remember for filing 2012 and 2013 US expat taxes. If you have any questions about your US expat taxes or would like to learn about our expat tax services, please contact us.