The U.S. government requires U.S. tax persons to report their “worldwide income” from any source whether it is earned in the U.S. or abroad. A U.S. tax person includes both U.S. citizens, green card holders and other persons satisfying the substantial presence in the U.S. standard.
Indian nationals residing in the U.S. who hold Indian accounts with an aggregate balance of over $10,000 (U.S.) are required to report those accounts on a Foreign Bank Account Report (“FBAR”). In addition, any income earned on those accounts need to be included on any U.S. income tax returns.
There are different types of Indian accounts that an Indian national may hold. A Non-resident Ordinary Account (“NRO”) is an account made for income earned in India. Income earned on an NRO may be taxed by the Indian government. There is a limit of $1 million (U.S.) net of taxes that can be repatriated from an NRO in any given year.
A Non-resident External Account (“NRE”) is an account which allows an Indian national to hold income earned outside of India and is not taxed by the Indian government. There is no limit on the amount that can be repatriated.
Funds held in both NRO’s and NRE’s must be in Indian Rupees.
Taxes paid to the Indian tax authorities for interest income earned from an NRO may be claimed as foreign tax credit on the U.S. tax return to avoid “double taxation”.
Another type of account an Indian national may hold is a Public Provident Fund (“PPF”). A PPF is savings vehicle that has restrictions on withdrawals and any earnings on a PPF are not taxed by the Indian government. Only an Indian citizen residing in India may initially open a PPF but if he or she becomes a resident of another country while holding the PPF, he or she may be allowed to hold the PFF under certain circumstances. While this type of account may be utilized as a retirement fund in India, it is not recognized by the U.S. as a tax-deferred retirement account. Therefore, the U.S. requires that income on PPF’s be included on an Indian national’s U.S. income tax return.
Recently, the IRS has announced more aggressive efforts in cracking down on Indian account holders, particularly in Northern California. If you have never reported income from your foreign accounts or foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (“OVDI”) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
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