To learn the tax implications, let us understand the Double Tax Avoidance Act (DTAA) Treaty between US and India.
US - India Tax Treaty: Double Tax Avoidance Act (DTAA)
The US-India Tax Treaty, also known as Double Tax Avoidance Act (DTAA), is an agreement between the United States and India that aims to ensure that NRI/ OCI/ PIOs are not taxed twice on the same income by both countries. The treaty provides for a number of benefits to the NRI, OCI, and PIOs, that includes the following:
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Exemption of certain types of income from taxation in both countries.
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Credit for taxes paid in one country against taxes payable in the other country.
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Limitation on the amount of tax that can be imposed on dividends paid by a company in one country to a resident of the other country.
The DTAA is a valuable tool for NRI/ PIO/ OCIs who want to minimize their tax liability.
How to Avoid Double Taxation?
NRI/ OCI/ PIOs who work in the US and have income from India can avoid double taxation by submitting a Tax Residency Certificate (TRC) issued by the US IRS to the Indian Central Board of Direct Taxes (CBDT).
Important Points for an NRI/ OCI/ PIO to Avoid Double Taxation under US India Tax Treaty:
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Article 15 of the DTAA (Double Taxation Avoidance Agreement) between India and the US allows for this exemption from TDS.
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Physical Presence Test: If you don’t have a green card and spend at least 31 days in the US during the current tax year and a total of 183 days during the last three tax years (inclusive of the current tax year), you’ll usually satisfy the physical presence test and are treated as a resident alien.
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If you fail the physical presence test, you are considered a non-resident alien in the US.
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The TRC will confirm that the NRI is a resident of the US for tax purposes, and therefore their Indian income should only be taxed in the US.
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This means that the Indian Central Board of Direct Taxes (CBDT) will not need to deduct TDS (tax deducted at source) from your income.
Income Tax for NRI/ OCI/ PIO in the USA
Non-Resident Indians (NRI) who are legal US residents are taxed on their income from all sources worldwide, just like US citizens. This means that you have to report all your income in your annual income tax returns, regardless of where you are earning it.
The income tax rules for NRI/ OCI/ PIOs in the USA are complex and depend on a number of factors, like:
Generally, NRIs are taxed on their US-source income, which includes:
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Salary Income
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Business Income
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Contractual/ Freelancing Income
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Income from Rental Properties
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Income from the Sale of Agricultural Land
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Capital Gains
How to Report Taxes?
NRI/ OCI/ PIO who have income in the United States are required to file a tax return with the Internal Revenue Service (IRS).
There are two main ways to file a tax return as an NRI:
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File Form 1040 NR: This is the traditional way to file a tax return as an NRI. You will need to complete Form 1040NR and attach any necessary schedules.
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File Form 1040 and use the Foreign Earned Income Exclusion (FEIE): The FEIE allows you to exclude a certain amount of your foreign-earned income from taxation. If you qualify for the FEIE, you will need to file Form 2555 with your Form 1040.
Wrapping It Up
Non-Resident Indians (NRI/ OCI/ PIO) need to navigate the tax systems of both the United States and India to properly manage their tax obligations. Understanding the tax rules and regulations in each country is crucial for NRI, OCI, and PIO to ensure compliance and minimize any potential double taxation.
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