How to Avoid Double Taxation on Indian Salary Income in the U.S.

Double Taxation Woes for Indian Taxpayers in the U.S.

Many Indian taxpayers working in the United States often face a dilemma they’ve already paid tax on their Indian salary or interest income, and now the IRS is asking them to pay U.S. tax on the same income again. Their current CPAs may not be well-versed in foreign income reporting or the India U.S. Tax Treaty, leading to incorrect filings and double taxation.

At Kewal Krishan & Co, we specialize in helping Indian professionals reduce or eliminate this tax burden by correctly applying treaty benefits, reporting foreign income, and filing the proper U.S. tax forms. Let’s walk you through how to legally avoid double taxation on your Indian salary income.

Tax Code Reference

The IRS allows a Foreign Tax Credit (FTC) under IRC §901, which enables you to claim a dollar-for-dollar credit for foreign taxes paid on the same income that is also taxed by the U.S. Additionally, the India U.S. Tax Treaty (Article 25: Relief from Double Taxation) applies.

Relevant IRS Forms

• Form 1040   U.S. Individual Tax Return
• Form 1116   Foreign Tax Credit
• Form 8938   Specified Foreign Financial Assets (if applicable)
• Schedule B   Interest and Dividend Income (Part III for foreign accounts)
• Form 2555   Foreign Earned Income Exclusion (rarely applicable for Indian residents)

Real-Life Example

Example: Ramesh worked in India till March 2024 and moved to the U.S. in April 2024 on an H-1B visa. He received ₹10 lakhs salary in India (approx. $12,000) and paid Indian taxes on it. After moving to the U.S., he became a U.S. tax resident under the Substantial Presence Test and filed Form 1040.

Mistake: His CPA included the $12,000 in U.S. income but didn’t claim the foreign tax credit. He ended up paying tax twice in India and again in the U.S.

Correct Filing:

• Report the $12,000 salary as foreign income on Form 1040
• File Form 1116 to claim a credit for the Indian tax paid
• Attach Schedule B and Form 8938 if applicable

Step-by-Step Guide to Avoid Double Taxation

1. Determine Tax Residency   If you meet the Substantial Presence Test, file as a resident (Form 1040). If not, use Form 1040-NR.
2. Convert Income to USD   Use the average yearly exchange rate (e.g., IRS yearly FX rates).
3. Report Foreign Income   Report the Indian salary under wages or Schedule 1, depending on the source.
4. Claim Foreign Tax Credit   File Form 1116 with accurate tax paid in INR converted to USD.
5. Attach Proof   Retain and, if needed, attach Indian Form 16 or ITR-V for evidence of tax paid.
6. Avoid FEIE for India   Generally not available since India is not a “foreign tax home” for H-1B filers.
7. Check the U.S. India Tax Treaty   Apply Article 25 for relief and attach treaty disclosure if necessary.

Conclusion

Double taxation isn’t just unfair it’s avoidable. The U.S. tax system provides mechanisms like Form 1116 and the U.S. India Tax Treaty to give you relief. But only if your CPA understands how to apply them.

Call to Action

If your CPA isn’t familiar with Indian income structures, Form 1116, or U.S. India treaty positions, you might be paying thousands more in unnecessary taxes. Anshul Goyal, CPA EA FCA is a licensed U.S. Certified Public Accountant, Enrolled Agent authorized to represent before the IRS, and a cross-border tax expert helping Indian residents and NRIs navigate complex IRS compliance.

About Our CPA

Anshul Goyal, CPA EA FCA is a U.S.-licensed CPA, Enrolled Agent, and Chartered Accountant (India) who specializes in IRS compliance for Indian H-1B holders, NRIs, and cross-border families. His firm, Kewal Krishan & Co, helps clients across the globe minimize tax burdens and file correctly.

Disclaimer

This blog is for informational purposes only. Tax situations vary based on residency, visa status, and the nature of foreign income. Consult a licensed CPA before making decisions. IRS rules and treaty interpretations are subject to change.

Top 5 FAQs

1. Can I avoid U.S. tax on my Indian salary?
No, but you can claim foreign tax credit to offset double taxation.

2. Which form do I use for Indian taxes paid?
Use Form 1116 to claim the Foreign Tax Credit.

3. Do I need to report salary already taxed in India?
Yes, report it on Form 1040 and apply FTC for taxes paid.

4. What if I didn’t claim foreign tax credit earlier?
You can amend your return using Form 1040-X and claim it.

5. Is there a treaty article that helps?
Yes, Article 25 of the U.S. India Tax Treaty helps avoid double taxation.