Both India and the United States have their independent statutes and mechanisms of tax administration, however, both follow a consistent global rule i.e. to tax the residents on their global income and nonresidents on their income “sourced” in the tax jurisdiction. Since the way you are taxed is based on your tax residency status; it becomes pertinent to understand the tax residency rules.
Residential status in India
Basic rules as explained under the Indian Income Tax Act, 1961 provide that if a person stays in India for more than 182 days in a tax year, he is regarded as a tax resident. This is true whether you are an Indian citizen or a foreign citizen, your immigration status, the purpose of your visit, etc. Additionally, the statute provides the following condition as well:
- If a person has stayed for more than 60 days in a tax year and has stayed for more than 365 days in the last four preceding tax years, he is considered as a tax resident of India, subject to the following exceptions:
- Being a citizen of India, he left India in the tax year as a member of the crew of the Indian ship; or
- Being a citizen of India, he left India in the tax year for the purposes of employment outside India; or
- Being a citizen of India or a person of Indian origin, who being outside India, comes on a visit to India; or
- Being a citizen of India or a person of Indian origin, who has income from Indian sources exceeding fifteen lakh rupees (in this case, if he stays in India for more than 120 days, he is regarded as a tax resident of India)
Residential status in the United States of America
The IRC provides the following broad categories of tax residency:
- You are a tax resident of the US, if you are a citizen of the US
- You are a tax resident of the US, if you hold a green card issued by the USCIS
- You are a tax resident of the US, if cumulatively you spent more than 182 days in the tax year calculated as below:
Say, if you do not satisfy the first two conditions and you wish to know whether you are a tax resident of the US for the present year, calculate your number of days as below and if the total of (1+2+3) is more than 182 days, you are considered as a tax resident of the US
- Days spent in 2020 X 1
- Days spent in 2019 X ⅓
- Days spent in 2018 X ⅙
Aforesaid, if you are a US citizen living in India, you are considered as a tax resident of both the United States and India.
We have compiled certain frequently asked questions and have answered them below.
Q1 Why can’t a United States citizen choose to be a tax resident in India?
The Internal Revenue Code provides that a United States citizen is by default treated as a tax resident irrespective of his place of residence and the Indian tax regulations provide that a person who resides in India for more than 182 days in a year is considered a tax resident of India. Given this, a citizen of the United States residing in India is considered a tax resident in both countries. Further, the United States has a savings clause in its treaty which does not allow a citizen of the United States to choose a tax residency with any other country and therefore a citizen is “forced” to be taxed as a resident in both countries.
Q2 I am a citizen of the United States and gainfully employed in India. Where should I offer my employment income and other passive incomes?
Both countries have a requirement for the resident to report global income on the tax return and therefore in this typical case you are required to report the salary income in both India and the United States. In fact, all incomes wherever earned are reportable and taxable on both India income tax return as well as the federal tax return.
Q3. Would the double income reporting not create hardship for a person as he would be required to pay double tax?
Generally, reporting and paying tax on the same income with both India and the United States would result in double tax, however, one can carefully apply sourcing rules to mitigate this problem to a great extent. In fact, the IRC provides foreign earned income exclusion benefits for American ex-pats who have their tax homes in a foreign country under which one can exclude up to $105,900 of the earned income. Further, the IRS allows a credit of the income tax paid on foreign “sourced” income. Similarly, one can claim the foreign tax credit on India’s tax return for taxes effectively paid in the United States.
Q4. How to claim the foreign tax credit?
Once you are sure about the sourcing rules and respective impacts, you can use tax credit forms available with the tax return to claim the foreign tax credit. The IRS allows you to use form 1116 to claim tax credit of the income tax paid on both passive incomes and earned income. Similarly, the India tax regulations allow tax credit under section 90, Schedule FSI of the income tax return, and form 67 to claim the foreign tax credit.
Additionally, it is important to file returns on time. Indian tax regulations do not allow foreign tax credit claims if the taxpayer failed to file the claim timely and before the due date of the return.
We have more than 10+ years of experience in the arena of business and financial consultancy and have been fortunate to be working with some remarkable individuals. While handling their federal and international tax matters, we have gained great insights on how to ensure expeditious filing process, coordinate with various authorities and fetch accurate information, how to effectively calculate and claim tax credits, how to avoid any scrutiny by IRS, etc with our personal favorite niche being the international tax expert on the variety of issues.