Need Expert Advice?Our Gurus Can Help
Moneywize |174 Answers |Ask -Follow
Financial Planner - Answered on Jun 20, 2024
MoneyWize helps you make smart investment choices.... more
Asked by Anonymous - Jun 19, 2024Hindi
I'm an NRI residing in New York. I'm confused about the tax regulations in both the USA and India. How can I ensure I'm compliant with tax regulations in both the countries and what should I watch out for?
Ans: Navigating tax regulations as a Non-Resident Indian (NRI) living in New York involves understanding the tax systems of both the United States and India. Here's a comprehensive guide to help you ensure compliance with tax regulations in both countries:
Understanding Tax Residency
United States:
• Resident Alien vs. Non-Resident Alien: For tax purposes, you are considered a resident alien if you pass the Green Card Test or the Substantial Presence Test.
• Substantial Presence Test: You must be physically present in the US for at least 31 days during the current year and 183 days over the past three years, calculated using a specific formula.
India:
• NRI Status: You are considered an NRI if you have spent less than 182 days in India during the financial year or less than 365 days in the preceding four years plus less than 60 days in the current year.
Filing Requirements
In the USA:
• Federal Taxes: File Form 1040 if you are a resident alien, reporting worldwide income. Non-resident aliens file Form 1040-NR.
• State Taxes: Depending on New York state regulations, you may need to file a state tax return.
• Foreign Accounts: If you have foreign bank accounts with a total value exceeding $10,000 at any time during the year, you must file FinCEN Form 114 (FBAR).
In India:
• Income Taxes: File ITR-2 if you have income from sources outside India and are an NRI. Report only income earned or accrued in India unless specified otherwise by the Double Taxation Avoidance Agreement (DTAA).
• TDS (Tax Deducted at Source): Ensure that TDS is correctly deducted on income from India (e.g., rent, dividends).
Double Taxation Avoidance Agreement (DTAA)
The DTAA between India and the USA aims to avoid double taxation on income earned in both countries. Key points include:
• Tax Credits: You can claim a tax credit in one country for taxes paid in the other.
• Reduced Rates: Certain types of income (e.g., dividends, royalties) may be taxed at reduced rates.
Specific Considerations
1. Global Income Reporting:
• In the USA, you must report your global income.
• In India, you report income earned in India if you are an NRI.
2. Foreign Tax Credit (FTC):
• Claim FTC in the USA for taxes paid in India on income taxed in both countries.
3. Investments:
• USA: Be aware of Passive Foreign Investment Company (PFIC) rules for investments in foreign mutual funds.
• India: Ensure compliance with the Foreign Exchange Management Act (FEMA) for investments in India.
4. Foreign Assets Reporting:
• USA: Report foreign financial assets exceeding specific thresholds using Form 8938.
• India: NRIs with certain specified foreign assets must file Schedule FA with their Indian tax return.
5. Estate and Gift Taxes:
• USA: Be aware of gift and estate tax rules if you transfer assets to or from India.
Steps to Ensure Compliance
1. Maintain Records:
• Keep detailed records of income earned, taxes paid, and days spent in each country.
2. Consult a Tax Professional:
• Engage a tax advisor experienced in international taxation to help navigate the complexities.
3. Regularly Review Tax Regulations:
• Stay updated on tax law changes in both countries.
4. Utilise Software and Tools:
• Use tax software that handles international taxation for accurate reporting and compliance.
By following these guidelines and seeking professional assistance, you can ensure compliance with tax regulations in both the USA and India.
Understanding Tax Residency
United States:
• Resident Alien vs. Non-Resident Alien: For tax purposes, you are considered a resident alien if you pass the Green Card Test or the Substantial Presence Test.
• Substantial Presence Test: You must be physically present in the US for at least 31 days during the current year and 183 days over the past three years, calculated using a specific formula.
India:
• NRI Status: You are considered an NRI if you have spent less than 182 days in India during the financial year or less than 365 days in the preceding four years plus less than 60 days in the current year.
Filing Requirements
In the USA:
• Federal Taxes: File Form 1040 if you are a resident alien, reporting worldwide income. Non-resident aliens file Form 1040-NR.
• State Taxes: Depending on New York state regulations, you may need to file a state tax return.
• Foreign Accounts: If you have foreign bank accounts with a total value exceeding $10,000 at any time during the year, you must file FinCEN Form 114 (FBAR).
In India:
• Income Taxes: File ITR-2 if you have income from sources outside India and are an NRI. Report only income earned or accrued in India unless specified otherwise by the Double Taxation Avoidance Agreement (DTAA).
• TDS (Tax Deducted at Source): Ensure that TDS is correctly deducted on income from India (e.g., rent, dividends).
Double Taxation Avoidance Agreement (DTAA)
The DTAA between India and the USA aims to avoid double taxation on income earned in both countries. Key points include:
• Tax Credits: You can claim a tax credit in one country for taxes paid in the other.
• Reduced Rates: Certain types of income (e.g., dividends, royalties) may be taxed at reduced rates.
Specific Considerations
1. Global Income Reporting:
• In the USA, you must report your global income.
• In India, you report income earned in India if you are an NRI.
2. Foreign Tax Credit (FTC):
• Claim FTC in the USA for taxes paid in India on income taxed in both countries.
3. Investments:
• USA: Be aware of Passive Foreign Investment Company (PFIC) rules for investments in foreign mutual funds.
• India: Ensure compliance with the Foreign Exchange Management Act (FEMA) for investments in India.
4. Foreign Assets Reporting:
• USA: Report foreign financial assets exceeding specific thresholds using Form 8938.
• India: NRIs with certain specified foreign assets must file Schedule FA with their Indian tax return.
5. Estate and Gift Taxes:
• USA: Be aware of gift and estate tax rules if you transfer assets to or from India.
Steps to Ensure Compliance
1. Maintain Records:
• Keep detailed records of income earned, taxes paid, and days spent in each country.
2. Consult a Tax Professional:
• Engage a tax advisor experienced in international taxation to help navigate the complexities.
3. Regularly Review Tax Regulations:
• Stay updated on tax law changes in both countries.
4. Utilise Software and Tools:
• Use tax software that handles international taxation for accurate reporting and compliance.
By following these guidelines and seeking professional assistance, you can ensure compliance with tax regulations in both the USA and India.
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
MoneyReply
You may like to see similar questions and answers below
Mahesh Padmanabhan | Answer |Ask -Follow
Tax Expert - Answered on May 03, 2023
Samkit Maniar |174 Answers |Ask -Follow
Tax Expert - Answered on Feb 10, 2024
Samkit Maniar |174 Answers |Ask -Follow
Tax Expert - Answered on Jul 25, 2024
Latest Questions
Dr Nagarajan Jsk |183 Answers |Ask -Follow
NEET, Medical, Pharmacy Careers - Answered on Dec 21, 2024
Dr Nagarajan Jsk |183 Answers |Ask -Follow
NEET, Medical, Pharmacy Careers - Answered on Dec 21, 2024
Dr Nagarajan Jsk |183 Answers |Ask -Follow
NEET, Medical, Pharmacy Careers - Answered on Dec 21, 2024
Ramalingam Kalirajan |7290 Answers |Ask -Follow
Mutual Funds, Financial Planning Expert - Answered on Dec 21, 2024
Kanchan Rai |444 Answers |Ask -Follow
Relationships Expert, Mind Coach - Answered on Dec 21, 2024
T S Khurana |260 Answers |Ask -Follow
Tax Expert - Answered on Dec 21, 2024
T S Khurana |260 Answers |Ask -Follow
Tax Expert - Answered on Dec 21, 2024
T S Khurana |260 Answers |Ask -Follow
Tax Expert - Answered on Dec 21, 2024
T S Khurana |260 Answers |Ask -Follow
Tax Expert - Answered on Dec 21, 2024
Ramalingam Kalirajan |7290 Answers |Ask -Follow
Mutual Funds, Financial Planning Expert - Answered on Dec 21, 2024
