Paying taxes in both the U.S. and India? You’re not alone. Many Indian-Americans and NRIs struggle with the fear of double taxation. Fortunately, the IRS allows you to claim a Foreign Tax Credit (FTC) to offset Indian taxes paid on the same income reported in your U.S. return.
But the process isn’t always straightforward. Without the right guidance, many taxpayers either lose the credit, trigger audits, or underclaim their benefits.
At Kewal Krishan & Co, we help clients recover thousands in taxes by properly claiming Form 1116 foreign tax credits-especially for Indian salaried income, fixed deposit interest, and mutual fund capital gains.
What is the Foreign Tax Credit?
Under IRC §901, U.S. taxpayers can reduce their federal tax liability by the amount of income taxes paid to a foreign country.
The IRS allows this through:
- Form 1116 – Foreign Tax Credit
- Form 1040 – Schedule 3 (Line 1)
The credit is non-refundable but can be carried back 1 year and forward 10 years per IRC §904(c).
Key Forms
- Form 1116 – To calculate the allowable credit
- Form 1040 – To report the credit on Schedule 3
- Form 8938 – If Indian accounts exceed thresholds
- FinCEN Form 114 – FBAR for Indian bank reporting
- Form 8833 – Treaty-based return position disclosure (if used)
Example: Claiming Credit for Indian Salary Tax
Ravi, an Indian citizen and U.S. tax resident under the Substantial Presence Test, earned ₹24 lakh in India during 2024-25 (about $29,000). India deducted ₹6.6 lakh (27.5%) in taxes under Section 192 of the Indian Income Tax Act.
In the U.S., Ravi also must report this income on his Form 1040, but he can file Form 1116 to claim a foreign tax credit of approximately $7,975 (subject to the foreign tax credit limit and conversion).
This reduces or fully eliminates double tax on the same income.
Who Can Claim the Credit?
To qualify, the taxpayer must:
- Be a U.S. citizen, green card holder, or tax resident
- Report foreign-sourced income on their U.S. tax return
- Have paid or accrued taxes to a foreign government
- Have foreign income tax legally owed and not refunded
Types of foreign income include:
- Indian salary
- NRO bank interest
- Indian capital gains
- Business income earned in India
Step-by-Step Guide: How to Claim FTC for Indian Taxes Paid
Step 1: Identify Foreign Income
Determine your Indian-sourced income (salary, FD interest, rental, capital gains, etc.).
Step 2: Gather Tax Documents
Collect Indian Form 16, Form 26AS, interest certificates, and mutual fund statements.
Step 3: Convert Taxes to USD
Use the IRS yearly average exchange rate for the tax year (e.g., $1 = ₹83 for 2024).
Step 4: Complete Form 1116
Choose the correct income category (e.g., general, passive), enter foreign income, taxes paid, and limitations.
Step 5: Attach Form 1116 to 1040
Report the resulting credit on Schedule 3, Line 1 of Form 1040.
Step 6: Keep Treaty Considerations in Mind
Use Form 8833 if relying on U.S.-India Tax Treaty Article 25 to avoid double taxation on certain income.
Pro Tip: Don’t Mix Passive and General Category Income
Indian FD interest (passive income) must be reported separately from Indian salary (general income). File separate Form 1116s per category to avoid IRS errors or delays.
Conclusion
Don’t pay taxes twice on the same income. The IRS gives you a legitimate way to neutralize Indian taxes via Form 1116-but only if you do it right. Get professional help if your situation includes multiple foreign accounts, NRE/NRO mix-ups, or PFIC investments.
Call to Action
Anshul Goyal, CPA EA FCA is a U.S.-licensed Certified Public Accountant and IRS Enrolled Agent. As a cross-border tax specialist, he helps Indian-Americans report Indian income correctly and maximize foreign tax credits. If you’ve paid Indian taxes and aren’t sure how to offset them in the U.S., schedule a review with our team today.
About Our CPA
Anshul Goyal is a U.S. CPA, Enrolled Agent (EA), and Fellow Chartered Accountant (FCA) who represents clients before the IRS and specializes in India-U.S. tax integration, Form 1116, Form 8938, FBAR, and offshore compliance.
Disclaimer
This blog is intended for general informational purposes only. It does not constitute legal or tax advice. Please consult a qualified CPA before making foreign tax credit claims or treaty elections.
FAQs
1. Can I claim a credit if India deducted TDS but I didn’t file an Indian return?
Yes, but you need proof (Form 16, Form 26AS) that the tax was withheld and not refunded.
2. Can I claim both FTC and FEIE (Form 2555)?
No, you must choose one method. FTC is usually better for Indian residents.
3. Do I need to convert Indian income into USD?
Yes, use the IRS-approved average exchange rate for the tax year.
4. Can I carry forward unused foreign tax credits?
Yes, up to 10 years forward and 1 year back as per IRC §904(c).
5. Do I need to file a separate Form 1116 for salary and interest?
Yes. General and passive income are different categories.