Everything You Need to Know About Your Expat Taxes in India

Living as an American Expat in India

India is home to more US expats than almost any other country—and it isn’t hard to see why. India has plenty to offer with a vibrant culture, delicious food, and ample career opportunities. But what are India’s tax policies like for an American living overseas? Read on for all the answers you need.

India at a Glance

What Are Expat Taxes Like for Americans Living in India?

If you live in India, you must pay taxes to the Indian government. Unfortunately, this doesn’t cancel your US tax obligations. The US has a citizenship-based taxation system, meaning citizens must report their income to the IRS regardless of where they live.

As you might expect, this can complicate your expat taxes. To help clear up any confusion, let’s take a closer look at how India may help you pay taxes as an American living overseas. 

Who Has to File Taxes in India?

India has a residence-based taxation system. There are three categories of tax residency under Indian law:

• Resident and ordinarily resident (ROR)
• Resident but not ordinarily resident (RNOR)
• Non-resident (NR)

Expats who qualify as ROR are taxed on their worldwide income. Expats who are RNOR or NR are only taxed on income that comes from an Indian source.

Who Qualifies as a Tax Resident in India?

As an American expat, you will be considered a resident of India if you meet either of the following standards:

• You spend at least 182 days in India in a single year
• You spend at least 60 days in India in a single year, as well as at least 365 days over the previous four years

If you do not meet these standards, you will be considered a non-resident for tax purposes. If you qualify as a resident, you will be either an ROR or an RNOR. (See the above section for more.) You will be considered an RNOR and taxed as a non-resident if either of the following is true:

• You have been a non-resident for at least nine of ten previous tax years.
• You have been in India for less than 730 days in the previous seven years.

Otherwise, you will be considered an ROR and taxed on your worldwide income.

What Types of Taxation Does India Have?

Income Tax

India taxes both residents and non-residents at the same progressive rates, ranging from 0% to 30%.

In India’s taxation system for the 2023 Tax Year, taxpayers have two options under the new regime:

1. New Tax Regime: This regime provides lower tax rates but requires taxpayers to forego certain exemptions and deductions that are typically available under the Income Tax Act. This option is beneficial for those who do not have significant investments or expenses that qualify for deductions.
2. Old Tax Regime: In this regime, taxpayers continue to pay taxes at existing, generally higher rates. However, they retain the benefit of availing various exemptions and rebates, such as deductions under Section 80C, House Rent Allowance, etc. This option is suitable for individuals who can take advantage of these deductions to reduce their taxable income.

The choice between these two regimes depends on individual financial circumstances, particularly in terms of income, investments, and eligible deductions. Taxpayers should carefully evaluate their situation or consult with a tax professional to make an informed decision that optimizes their tax liability.

This dual-regime approach allows flexibility and caters to diverse taxpayer profiles, enabling individuals to choose a tax structure that aligns best with their financial planning and deductions.

Under the New Tax Regime:

• The basic exemption limit is INR 300,000.
• The tax rates are as follows:
  • 0% for income up to INR 300,000
  • 5% for income between INR 300,000 to INR 600,000
  • 10% for income between INR 600,000 to INR 900,000
  • 15% for income between INR 900,000 to INR 1,200,000
  • 20% for income between INR 1,200,000 to INR 1,500,000
  • 30% for income over INR 1,500,000

Under the Old Tax Regime:

• For individuals under 60 years, the basic exemption limit is INR 250,000.
• The tax rates are:
  • 0% for income up to INR 250,000
  • 5% for income between INR 250,001 to INR 500,000
  • 20% for income between INR 500,001 to INR 1,000,000
  • 30% for income above INR 1,000,000

For senior citizens (ages 60 to 80), the basic exemption limit is INR 300,000, and for super senior citizens (above 80 years), it is INR 500,000.

Capital Gains Tax

India taxes capital gains resulting from selling various assets, including property and securities. Capital gains are taxed at different rates based on residency status and the length of time the seller held the asset.

• Long-term capital gains are generally taxed at 10%
• Short-term capital gains are generally taxed at 15%

Value-Added Tax

India imposes a value-added tax (VAT) on certain goods and services. The rate for this tax ranges from 5% to 28, but it is most commonly set at 18%.

Property Tax

Property is taxed at the local level. The rate for property taxes varies by region.

Corporate Income Tax

As with individual taxation, India’s corporate tax policies are based on residency. Resident companies are taxed on their worldwide income, while non-resident companies are taxed on only their Indian-source income. For domestic companies, the rate ranges from 25% to 30%. For foreign companies, the rate is fixed at 40%.

Provident Fund

In India, there is no social security tax, but rather a provident fund system. Employees contribute 12% of their basic salary to this fund, matched equally by the employer. This system is somewhat akin to the 401k plan in the US, but with key differences. Notably, contributions to this provident fund are not eligible for tax deductions on US tax returns. Instead, both employee and employer contributions are added back when calculating gross income for reporting on US tax returns.

Essential Tax Forms for US Expats in India 

If you are a US expat living in India, there are several essential tax forms you need to be aware of to ensure that you remain compliant with US tax laws. Here are some of the most important tax forms: 

• Form 1040: This is the main tax form that all US citizens and residents must file every year, regardless of where they live. As a US expat in India, you will need to file a US tax return using Form 1040. 
• Form 2555: This form is used to claim the Foreign Earned Income Exclusion (FEIE), which allows you to exclude a certain amount of foreign-earned income from your US taxable income. To qualify for the FEIE, you must meet certain residency and physical presence requirements. 
• Form 1116: This form is used to claim the Foreign Tax Credit (FTC), which allows you to offset your US tax liability with taxes paid to India. The FTC is particularly useful if you are subject to higher tax rates in India than in the US. 
• FBAR: The Foreign Bank Account Report (FBAR) is used to report foreign bank accounts if the total value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. 
• FATCA: The Foreign Account Tax Compliance Act (FATCA) requires US citizens and residents to report certain foreign financial assets on Form 8938 if their value exceeds certain thresholds. 

These are just a few of the essential tax forms for US expats in India. It’s important to work with a qualified expat tax professional service like Greenback to ensure that you are filing all the necessary forms and staying compliant with US tax laws. 

When Are Taxes Due in India?

The Indian tax year starts on April 1 and ends on March 31 of the following year. Tax returns are due on July 31. In cases where a taxpayer is required to have their books of account audited, the due date is pushed back to October 31.

Does the US Have a Tax Treaty with India?

Yes. The US-India tax treaty defines which country has the right to tax a given income stream, removing the risk of double taxation. In most cases, you will pay your taxes to the country in which you are considered a resident.

The tax treaty covers a range of taxes, including income tax, estate tax, and gift tax. It also includes provisions for resolving disputes and exchanging information between the two countries tax authorities. Under the treaty, residents of one country are given certain tax benefits in the other country, such as reduced withholding taxes on dividends, interest, and royalties. 

The tax treaty has played an important role in facilitating trade and investment between the US and India. It has helped to create a more predictable and stable tax environment for businesses and individuals operating in both countries. 

Does the US Have a Totalization Agreement with India?

No. The US and India do not currently have a totalization agreement in place. This means that Americans who live and work in India may be required to contribute to both nations’ social security systems.

Navigating Tax Compliance for US Expats in India

Navigating tax compliance as a US expat in India can be a daunting task, but it doesn’t have to be. With the right guidance and resources, you can confidently navigate the complexities of expat taxes and ensure compliance with both Indian and US tax laws.

Remember to stay informed about the latest tax regulations, keep accurate records, and seek professional help when needed. By taking these steps, you can avoid penalties, protect your finances, and enjoy a stress-free life as an expat in India.

If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.