How to Report Indian Bank Interest on Your U.S. Tax Return

Why Most CPAs Miss This Crucial Reporting

Many Indian-Americans and NRIs working with generic CPAs or tax preparers often miss reporting their Indian bank interest correctly on their U.S. tax return. These preparers may not fully understand the cross-border tax nuances especially how interest from Indian savings, FDs (Fixed Deposits), or NRO accounts must be reported in the U.S. under global income rules.

At Kewal Krishan & Co, we’ve helped hundreds of clients fix missed foreign interest disclosures, saving them from penalties, amended returns, and even IRS audits. Strategic tax planning around Indian bank interest can save up to $50,000, which compounds into over $1 million in tax savings over the next 10 years for HNIs and business owners.

Let’s break this down step by step.

1. IRC & Global Income Rule

Under IRC §61(a)(4), U.S. tax residents must report all income from any source, including foreign interest. That means:

• Indian Savings Interest
• Indian Fixed Deposit (FD) Interest
• Indian Recurring Deposit Interest
• NRO Account Interest
  …all must be reported on your Form 1040.

This applies whether the funds are withdrawn or not. Even if TDS (Tax Deducted at Source) is applied in India, you must still report the gross interest in the U.S.

2. Which IRS Forms Are Required?

Here are the relevant forms:

• Form 1040   Schedule B (Interest Income)
  Report all interest earned, including Indian bank/FDR/NRO interest.
• Form 8938   Statement of Specified Foreign Financial Assets
  If your total Indian assets exceed $50,000 (or $100,000 MFJ), you must file this.
• FBAR (FinCEN Form 114)
  If total foreign bank balances exceed $10,000 at any time in the year, you must file this.
• Form 1116   Foreign Tax Credit
  If Indian tax was withheld (TDS), you may claim a foreign tax credit to offset double taxation.

3. Example

Scenario:
Mr. Arjun, a U.S. tax resident, earns $2,500 interest from an FD in India. TDS of $750 (30%) is deducted by the Indian bank.

Reporting Steps:

1. Report $2,500 on Schedule B (even if not remitted).
2. Disclose the bank and interest on Form 8938.
3. If total balances exceed $10,000, file FBAR.
4. Claim the $750 Indian tax as a foreign tax credit on Form 1116.

Result: U.S. tax only applies on the net difference. No double taxation. Audit-proof return.

4. Step-by-Step Guide to Comply

1. Collect Indian Interest Certificates: Download Form 16A or bank summaries from your NRO/Savings account in India.
2. Convert INR to USD: Use the IRS Yearly Average Exchange Rate.
3. Report Gross Interest on 1040 Schedule B.
4. File FBAR & Form 8938 if thresholds are crossed.
5. File Form 1116 to claim foreign tax credit (TDS from Indian bank).
6. Retain Supporting Documents: Form 16A, bank statements, interest certificates.

5. Conclusion

Foreign interest is not exempt just because it’s earned in India. U.S. tax residents especially H-1B holders, NRIs, or green card holders must report Indian interest income to avoid IRS scrutiny. With penalties up to $10,000+ per form, non-compliance is expensive.

At Kewal Krishan & Co, we help Indian-origin taxpayers in the U.S. legally reduce their IRS tax liability while staying fully compliant.

Call to Action

If you have Indian bank accounts, FDs, or NRO/NRE accounts and are unsure how to report them correctly, speak with Anshul Goyal, CPA, EA, FCA.

Anshul Goyal is a licensed Certified Public Accountant in the United States, admitted to practice before the IRS as an Enrolled Agent. He represents clients in IRS audits and litigation and is a cross-border tax expert who assists American businesses and Indian taxpayers in complying with complex U.S. tax laws.

About Our CPA

Anshul Goyal leads the international tax practice at Kewal Krishan & Co, focusing on NRIs, H-1B visa holders, and foreign account holders. He is well-versed in IRS forms like 8938, FBAR, and Form 1116, and helps clients mitigate penalties through accurate and timely filings.

Disclaimer

This blog is intended for general information only and does not constitute legal or tax advice. Every taxpayer’s situation is unique. Please consult a qualified tax professional for personalized guidance.
Anshul Goyal, CPA EA FCA is authorized to represent clients before the IRS and specializes in cross-border taxation between India and the United States.

Top 5 High-Searched FAQs

1. Do I have to report interest from Indian fixed deposits in the U.S.?
Yes. U.S. tax residents must report all worldwide income including FD interest from India.

2. Can I claim TDS paid in India as a credit in the U.S.?
Yes, using Form 1116, you can claim a foreign tax credit.

3. What if I didn’t withdraw the interest from India?
Still taxable. U.S. taxes income when it is earned, not withdrawn.

4. Do I need to file FBAR for Indian bank accounts?
Yes, if aggregate balances exceed $10,000 anytime in the year.

5.Do I need to file Form 8938 if I already filed FBAR?
Yes, the two forms are not substitutes. Both may be required.