Is NRE account interest taxable in the USA?

Yes. While interest on Non-Resident External (NRE) accounts is tax-free in India under the Income Tax Act, the US IRS taxes global income. You must report this interest on Schedule B of your US tax return.

Do I need to report my PPF account to the IRS?

Yes. Public Provident Fund (PPF) accounts are considered foreign financial accounts. You must report the account on your FBAR (FinCEN Form 114) if your total foreign assets exceed $10,000. Additionally, the accrued interest is taxable annually in the US.

Can I hold Indian Mutual Funds while in the US?

It is not recommended. Indian Mutual Funds are classified as Passive Foreign Investment Companies (PFIC) by the IRS. They are subject to punitively high tax rates and complex reporting on Form 8621. It is often better to invest in US-based ETFs that hold Indian stocks.

What happens to my 401(k) if I move back to India?

You can leave it in the US and let it grow. If you withdraw it early, you pay a 10% penalty plus income tax. However, if you withdraw it after age 59.5 while a resident of India, you may pay a lower tax rate depending on the DTAA provisions.

Does the India-US DTAA prevent double taxation?

Yes. The Double Taxation Avoidance Agreement (DTAA) allows you to claim a Foreign Tax Credit (Form 1116) in the US for taxes paid in India (like TDS on NRO accounts), preventing you from paying tax on the same income twice.

Indian Expats in USA: The Ultimate Tax Guide 2025

1. The India-US Account Tax Matrix

The most common mistake Indian expats make is assuming "Tax-Free in India" means "Tax-Free in the USA". It does not. The IRS taxes based on residency, not the source of income.

Account Type	Indian Tax Rules 🇮🇳	US Tax Rules 🇺🇸	Action Required
NRE FD / Savings Non-Resident External	Tax Free Exempt u/s 10(4).	Fully Taxable Interest is taxed as ordinary income.	1. Report Interest (Sched B) 2. Report Balance (FBAR) 3. No FTC credit (since no India tax paid).
NRO Account Non-Resident Ordinary	Taxable 30% TDS + Cess deducted by bank.	Fully Taxable Taxed as ordinary income.	1. Report Interest (Sched B) 2. Report Balance (FBAR) 3. Claim Form 1116 (Credit for India TDS).
PPF Public Provident Fund	EEE Status Exempt-Exempt-Exempt.	Taxable Accrued interest is taxed yearly.	1. Calculate annual accrual manually. 2. Report on FBAR. 3. Report on Form 8938 (if high value).
FCNR Foreign Currency Non-Resident	Tax Free	Taxable Taxed as interest.	Report Interest & FBAR. Advantage: No currency fluctuation risk.
LIC Policies Life Insurance Corp	Exempt Maturity usually tax-free.	Complex Cash value increase may be taxed.	Check "Excise Tax" rules (1% of premium). Report on Form 8938.

🧮

NRE Tax Estimator

How much US tax will you owe on your "Tax Free" NRE FD?

FD Principal Amount (INR)

Interest Rate (%)

Your US Tax Bracket (%)

Exchange Rate (USD/INR)

2. The Mutual Fund Trap (PFIC)

This is the most dangerous area of US-India taxation. If you hold Indian Mutual Funds (SIPs, Growth Funds, ELSS), you are walking into a tax minefield.

⚠️ What is a PFIC?

The IRS classifies non-US mutual funds as Passive Foreign Investment Companies (PFIC). Unlike US stocks which enjoy a 15-20% Capital Gains tax rate, PFICs are treated punitively.

The Punishment (Section 1291):

Taxed at the highest ordinary income rate (37% +).
Throwback Tax: Interest is charged for every year you held the fund without paying tax.
Form 8621: Must be filed for EACH fund annually. Professional prep often costs $200+ per fund.
Losses cannot be deducted easily.

✅ The Smart Alternative

Instead of holding HDFC/SBI Mutual Funds directly, invest in US-domiciled ETFs that hold Indian stocks. These are fully IRS-compliant.

Asset Class	Indian PFIC (Bad)	US ETF (Good)
Large Cap	HDFC Top 100	INDA (iShares MSCI India)
Tech	Tata Digital India	INQQ (India Internet)
Small Cap	SBI Small Cap	SMIN (MSCI India Small Cap)
Earnings	Kotak Emerging	EPI (WisdomTree India Earnings)

*Holding individual stocks directly (e.g., Reliance Industries shares) is NOT a PFIC.

3. FBAR & FATCA Compliance

The US government uses the BSA (Bank Secrecy Act) to track foreign money. Penalties for non-compliance start at $10,000 per violation. "I didn't know" is not a valid defense.

📂 FBAR (FinCEN 114)

The Rule: If the aggregate value of all foreign financial accounts exceeds $10,000 at any point in the calendar year.

What Counts: Savings, Current, NRE, NRO, PPF, EPF, Mutual Funds, Life Insurance Cash Value.

Deadline: April 15 (Automatic extension to Oct 15).

📝 FATCA (Form 8938)

The Rule: Higher thresholds for "Specified Foreign Financial Assets."

Single in US: >$50k (Year End) or >$75k (Peak)
Married in US: >$100k (Year End) or >$150k (Peak)
Expats in India: >$200k (Single) or >$400k (Married)

Filed To: IRS (Attached to Form 1040).

🤖

Reporting Wizard

Check which forms you need to file.

1. Maximum aggregate value of ALL foreign accounts (USD)? 2. Your Tax Filing Status?

4. India-US Tax Treaty (DTAA)

The Double Taxation Avoidance Agreement (DTAA) is your shield. It prevents you from paying tax twice, but it must be claimed correctly.

Article 21 (Students)

Indian students (F-1) can claim the Standard Deduction (approx $14,600) even as nonresidents. This is a unique benefit for India not available to citizens of China, UK, or Europe.

Benefit: ~$1,500 Tax Saved

Article 25 (Relief)

This allows for Foreign Tax Credits. If India deducts 30% TDS on your NRO account, you can claim a dollar-for-dollar credit against your US tax bill using Form 1116.

Benefit: No Double Tax

Article 20 (Pensions)

Allows for the deferral of tax on retirement funds (like EPF) until distribution. This prevents the US from taxing your EPF growth while you are working in India.

Benefit: Tax Deferral

5. Selling Property in India

Selling a flat in Mumbai or Bangalore? Be careful of the TDS vs. Capital Gains trap.

🏠 The TDS Trap (Section 195)

When an NRI sells property in India, the buyer MUST deduct TDS.

TDS Rate: Usually 20% to 23.92% (on the entire sale price in some cases, or capital gains if Certificate is obtained).
The Problem: India takes the tax immediately. The US taxes the Capital Gain (Sale - Purchase) at tax filing time (April).
The Fix: You must file an India Income Tax Return to claim a refund of excess TDS. You then claim the actual Indian tax liability as a Foreign Tax Credit in the US.

Warning: Do not pay the US tax without claiming the Indian credit, or you will pay ~40% total tax.

6. Moving Back to India

Returning home? You need a strategy for your US assets. The "Resident but Not Ordinarily Resident" (RNOR) status is your golden window.

🇺🇸 401(k) Strategy

Option A: Break it (Bad)
Withdraw everything. Pay Income Tax + 10% Penalty. Lose ~40% instantly.

Option B: Let it Grow (Good)
Leave it in the US. It grows tax-free. Withdraw slowly after age 59.5.

Option C: Roth Conversion
Convert to Roth IRA in low-income years before moving back.

🇮🇳 The RNOR Benefit

When you return to India, you qualify as RNOR for up to 2-3 years.

Benefit: Foreign income (US interest, dividends, 401k) is NOT taxed in India.
Strategy: "Reset" your cost basis on US stocks (Capital Gains harvesting) during this window.

✈️

RNOR Checker

Will you qualify for RNOR status upon return?

Years spent OUTSIDE India in the last 10 years:

Selected: 5 years

7. State-Specific Rules for Indians

Where you live matters. Some states do not follow federal treaties, leading to unexpected tax bills.

California 🐻

No Treaty Recognition. CA does not honor the India-US DTAA. Your HSA contributions are taxable. Foreign income is fully taxed.

High Risk

New Jersey 🍅

High Indian Population. NJ taxes 401(k) contributions in some cases. No treaty recognition. Foreign income taxed.

High Tax

New York 🗽

Residency Traps. If you keep an apartment in Mumbai, NY might claim you are not "domiciled" in NY, complicating audits.

Complex

Texas 🤠

No Income Tax. The best state for Indian expats. No state tax on NRE interest or Capital Gains.

Tax Haven

Washington 🌲

No Income Tax. (Except Capital Gains tax on high earners >$250k). Generally excellent for tech workers.

Tax Haven

Illinois 🌽

Flat Tax. Generally follows federal rules but has fewer deductions. Foreign income flows through from federal.

Neutral

📚 The Expat Tax Glossary

Decoding the jargon used by CAs and CPAs.

A

AMT (Alternative Minimum Tax): A parallel tax system ensuring high earners pay at least some tax. Often triggered by ISO stock options.

C

Cess: An additional tax surcharge in India (e.g., Health & Education Cess).

D

DTAA: Double Taxation Avoidance Agreement. The treaty between India and US.

F

FATCA: Foreign Account Tax Compliance Act. The law forcing Indian banks to report to the IRS.

FTC (Foreign Tax Credit): Using Form 1116 to offset US tax with Indian tax paid.

I

ITIN: Individual Taxpayer ID Number. For spouses/dependents who cannot get an SSN.

N

NRE: Non-Resident External. Rupee account, funds originate outside India. Tax-free in India, taxable in US.

NRO: Non-Resident Ordinary. Rupee account for India-sourced income (rent, dividends). Taxable in both.

P

PFIC: Passive Foreign Investment Company. Indian Mutual Funds.

R

RNOR: Resident but Not Ordinarily Resident. Special status for returning Indians.

Frequently Asked Questions

General Questions

Can I hide my Indian accounts?

No. Under FATCA, Indian banks (HDFC, ICICI, SBI) share data with the IRS. Hiding accounts is a felony.

How is PPF interest calculated?

Since PPF does not issue a 1099, you must manually calculate "accrued interest" each year based on passbook entries and report on Schedule B.

Can I send money to parents tax-free?

Yes. Remittances are not taxable income for parents. If sending >$18,000/year/person, file Form 709 (Gift Tax). No tax usually owed.

Advanced / H-1B

I missed FBAR for 3 years. Am I in trouble?

Use the Streamlined Filing Compliance Procedures. It's an amnesty program for "non-willful" errors. 5% penalty or 0% penalty options exist.

Does my H-4 spouse need to file?

If they have an ITIN and you file jointly, yes. If they have Indian income (NRO), it must be reported on your joint return.

Is LIC Maturity taxable?

It depends. If the premium paid was high compared to the death benefit, it might be an investment contract, not insurance. The gain is taxable.

Specialized Filing Packages

Expert preparation for Indian citizens, reviewed by CPAs familiar with cross-border issues.

Student (F-1)

$49

Basic 1040-NR

✅ Article 21 Benefits
✅ FICA Refund Assessment
✅ Form 8843 Included

Select Student

Expat Standard

$149

Interest & FBAR

✅ NRE/NRO Interest Reporting
✅ FBAR (Up to 5 accounts)
✅ Foreign Tax Credit (Form 1116)

Select Standard

Global Elite

Custom

Property & PFIC

✅ Property Sale (Capital Gains)
✅ Form 8938 (FATCA)
✅ PFIC / Mutual Fund Analysis

Get Quote

Free Initial Assessment

Not sure if you need to file FBAR or pay tax on your NRE account? Upload your details securely.

Indian Expats in USA:The Ultimate Tax Guide 2025