Top 10 US Tax Mistakes Made by Indian NRIs And How to Avoid Them

Why Indian NRIs End Up Overpaying Taxes

Many Indian NRIs in the U.S. unknowingly make serious mistakes on their U.S. tax returns often because their tax preparer isn’t well-versed in cross-border tax issues. From missed credits to double taxation, these missteps can cost thousands of dollars.

At Kewal Krishan & Co, we help Indian families, professionals, and entrepreneurs in the U.S. fix these issues often saving them over $50,000 in taxes, which could grow to $1 million+ over 10 years through proactive planning.

1. Not Reporting Global Income (IRC §61)

Under IRC §61, U.S. tax residents (including NRIs on H-1B, L1, Green Card, etc.) must report worldwide income including:

• Indian bank interest
• Fixed deposit income
• Indian salary if still on payroll

Example:
Ravi, an H-1B worker in Texas, forgot to report ₹5,00,000 FD interest (≈$6,000). IRS Form 1040 requires this in the “Interest” section. Omitting it = risk of audit + penalties.

2. Missing FBAR/FinCEN 114 Filing

Any Indian NRI with combined foreign accounts over $10,000 at any point during the year must file FBAR.

• Form: FinCEN 114 (due April 15 with automatic extension to October)
• Applies to: NRO, NRE, Indian Demat, LIC, PPF, EPF, etc.

3. Skipping Form 8938 (FATCA Compliance)

If your foreign assets exceed $50,000, you may also need to file Form 8938 under the FATCA law (IRC §6038D).

• Must be filed with your Form 1040
• Overlaps with FBAR but is NOT a substitute

4. Double Taxation on Indian Salary or Interest

If taxes were paid in India (e.g., TDS on FD or salary), you may be eligible for a Foreign Tax Credit on IRS Form 1116 to avoid double taxation.

• Must keep Form 16A or TDS certificates as proof
• Include Form 1116 in your 1040

5. Not Claiming the India U.S. Tax Treaty Benefits

Many NRIs don’t use the India U.S. DTAA (Double Tax Avoidance Agreement) to:

• Avoid taxation on Indian dividends (Article 10)
• Claim FTCs and reduce U.S. tax
• Avoid capital gains double taxation

6. Incorrect Residency Determination

Under the Substantial Presence Test (IRC §7701(b)), many NRIs become U.S. tax residents earlier than they think. This affects:

• Filing status
• Income sourcing
• Global income reporting

7. Using Standard Deduction Instead of Itemized

Indian NRIs with property in India can itemize:

• Mortgage interest (if applicable)
• Real estate taxes paid in INR
• Donations to Indian registered 80G NGOs (if claimed in India)

8. No Planning for Gifting & Remittance

IRS Form 3520 must be filed if you receive gifts >$100,000 from NRI parents or relatives. Failure leads to penalties of 25%+ of the gift.

Also plan for:

• POEM rules in India
• U.S. estate & gift tax on worldwide assets

9. Reporting Indian Mutual Funds Incorrectly

Indian Mutual Funds = PFICs in the U.S. (IRC §1291 1298). You may need:

• Form 8621
• Annual reporting for EACH fund
• Possible tax on unrealized gains

10. Hiring the Wrong CPA

U.S.-based CPAs often don’t understand Indian laws. Indian CAs may not understand U.S. rules. What you need is a cross-border CPA who understands:

• Indian tax laws
• U.S. compliance
• DTAA
• FATCA & FBAR
• Form 5471/3520/8621

Step-by-Step Compliance for Indian NRIs

1. Determine U.S. residency under the Substantial Presence Test (IRS Pub 519)
2. Collect all global income and TDS certificates
3. File FBAR and Form 8938 if thresholds are met
4. Report foreign income on Form 1040
5. Claim Foreign Tax Credit via Form 1116
6. Consult a cross-border CPA for Form 3520, 8621, and treaty planning
7. Avoid using online DIY software for complex international returns

Conclusion

Indian NRIs living in the U.S. often unknowingly make tax errors that lead to double taxation, IRS notices, or underclaiming refunds. These are avoidable with expert help. Correcting these can put real money back in your pocket both immediately and over time.

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States, admitted to practice before the IRS as an Enrolled Agent. He represents clients in tax litigation and is a cross-border tax expert assisting American businesses and Indians living in the U.S. with complex IRS and international tax compliance matters.

Disclaimer

This blog is intended for informational purposes only and does not constitute legal or tax advice. Tax rules change frequently and individual circumstances vary. Please consult a qualified tax professional before taking any action.

Top 5 High-Searched FAQs for Indian NRIs

1. Do I have to pay tax in the U.S. on Indian fixed deposits?
Yes, U.S. residents must report and pay tax on worldwide interest income.

2. Is it mandatory to file FBAR if I have ₹15 lakh in Indian accounts?
Yes, if total balances exceed $10,000 at any time, FBAR is required.

3. Can I get tax credit in the U.S. for TDS deducted in India?
Yes, via Form 1116 if the income is taxable in both countries.

4. Do I need to report mutual funds held in India?
Yes, using Form 8621 due to PFIC rules.

5. What if I missed filing FBAR or FATCA?
You may be eligible for the Streamlined Filing Procedure to avoid penalties