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Monday, December 30, 2013

Tax obligations of an American passport holder living in India

If you hold an American passport or Green card, yet you reside in India for most of the year, your tax calculations in the two countries can be quite confusing. It is advisable to take the help of a tax consultant to file you taxes in both the countries.


Some Important facts

Here are some important points which you must know about taxation:

·         Both USA and India levy tax on you depending on your nationality and not your place of residence. Moreover, the source of your income or your economic ties is also considered. So, if you are an US citizen living in India, you still have to file taxes in USA as its citizen and also in India as you earn your income here.

·         If you never file your taxes in USA, your obligations do not disappear. The statute of limitation does not expire on such cases. However, if you do file returns, there is a three years statute of limitation on unpaid taxes since the last time you filed returns. So, it is best to file returns every year.

·         If you do not file returns in USA, when time comes to renew your passport or Green Card, questions may be asked. Similarly, if you do not file in India, when time comes to renew your visa, you may face a sticky situation.

·         Finally, USA and India has Double Tax Avoidance Agreement (DTAA). This allows you to avoid being taxed in both countries for the same income.

Filing your tax returns on income from different sources

Here is a brief synopsis of tax returns on different types of income for an American passport holder living in India. You should know that if you live in India for 330 consecutive days, you are eligible for a tax exemption up to $91500 income in the USA.

·         Pension – A common scenario is you worked in USA and settled in India after retirement. If you were employed by private company, this pension earning will be taxed only in India and you need to submit Form 8833 with your US tax returns. If you worked in public office, the rules may vary.

·         Earned income – If you are earning income in India by working in a concern or by self employment, the income will be taxed only in India and you need to file Form 8833 in accordance with DTAA in the USA. You will get no tax credit for income up to $91500, but above that you will be able to claim foreign tax credit in USA.

·         Rent – If you earn income on rent, you will have to pay tax on it in the country where the property is located. You can claim tax credit from the other country.

·         Interest and dividends – When you earn interest or dividend from an American company, you will be taxed at a lower rate. Then you declare the interest income in India and pay tax on it and claim tax credit for the part paid in USA. For dividend from Indian company, you need not pay taxes in India where dividend is tax free, but you have to declare it in USA and pay tax on it. For interest earned in India, you pay tax in India; then claim a credit in USA.

·         Capital gains – On income earned through capital gains, you pay tax to the country where you earned it and claim credits in the other.

The tax laws are complicated and ever changing. Be sure to get expert advice on both countries when filing your tax returns.

1 comment:

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