Filing in the US With Indian Income

If you are a US citizen, a green card holder, or a visa holder who passes the substantial presence test, the interest, rent, dividends and gains you earn in India belong on your US return, in dollars, whether or not India taxed them and whether or not the money ever left India. India usually taxes much of the same income first. This chapter puts the two systems side by side for the income an Indian household actually has, and shows how the foreign tax credit and the India-US treaty keep one rupee from being taxed twice in full. The general US rules are in the visa shelf chapters on worldwide income and on rent, interest and gains from home; what follows adds the Indian half of each answer.

Which country taxes what

The table reads left to right: what India does, what the US does, and whether there is Indian tax to credit. Indian rules are from the Income-tax Act, 2025 (in force for tax years from 1 April 2026), with the 1961 Act section in brackets because most people still search by it.

Two lines in this table cause most of the surprises. The first is that NRE and FCNR interest is "tax-free" only in India. The second is that Indian tax on NRO interest is not always the amount the US lets you credit. Both are explained below. Indian mutual funds are covered in the visa shelf chapter on foreign funds and the PFIC rules, and PPF, EPF and NPS in chapter 8 of this book.

Two calendars, two currencies

Your US return covers January to December. India's tax year runs from 1 April to 31 March. Interest that an Indian bank reports for "FY 2026-27" therefore straddles two US returns. Ask the bank for an interest certificate by calendar year, or build one from the monthly statements, so the right amount lands on the right US return.

Every rupee amount must be converted to dollars. The IRS says to use the exchange rate prevailing when you receive, pay or accrue the item, and generally accepts any posted rate that is used consistently (IRS, "Foreign currency and currency exchange rates" and "Yearly average currency exchange rates"). Many filers use a yearly average rate for interest and rent that arrive through the year, and the rate on the actual date for a sale. The foreign tax is converted too, on the date it was paid. Pick one method, write it down, and keep the source of the rates.

What Indian income does to a US bracket

Foreign income stacks on top of your salary, so it is taxed at the top bracket it reaches. The example below uses interest from a deposit in India, added to wages.

A deposit of $60,000 at 6.5% earns $3,900 in a year. On wages of $150,000 the 2026 federal tax is $24,734; with the interest added it is $25,670, because every extra dollar is taxed at 24.0%, the top bracket reached. State tax comes on top where there is one. Whether any of that US tax is offset depends on how much tax India collected on the same interest, which is the next section.

The foreign tax credit, and the NRO interest problem

The credit is a dollar-for-dollar reduction of US tax for qualifying foreign income tax, limited to the US tax on the foreign income. The general rules are in the visa shelf chapter; two points are specific to India.

First, only the treaty-rate part of the tax on NRO interest counts. Under section 393(2) (formerly section 195), a bank paying interest to a non-resident deducts tax at "rates in force". For a non-resident Indian's income that is not specially listed, the Finance Act 2026 (First Schedule, Part II) sets a flat rate, and a health and education cess is added on top; together they come to 31.2%, before any surcharge. The India-US treaty, Article 11(2)(b), caps India's tax on interest paid to a US resident at 15%. IRS Publication 514 says what follows from that: where a treaty rate is lower and the excess is refundable, the qualified foreign tax is the amount figured at the treaty rate, "not the amount actually paid". So of the tax the bank withheld, only the treaty-rate share is creditable. The rest is money you can claim back in India (chapter 2), and a credit you cannot use here.

The practical fix is to give the bank proof that you are a US tax resident so it deducts at the treaty rate from the start. The IRS issues that proof as Form 6166, on request using Form 8802. Chapter 2 covers the paperwork.

Second, the credit is not a refund of the 3.8% net investment income tax. Higher earners owe 3.8% on investment income, including Indian interest, rent and gains, once income passes $200,000 (single) or $250,000 (joint). Treasury Regulation 1.1411-1(e) does not let a foreign tax credit reduce it. The Federal Circuit rejected a treaty-based argument to the contrary on 31 August 2026 in two decisions about the Canada and France treaties (Estate of Bruyea and Christensen); whether there is a further appeal was not confirmed when this was written. Plan on paying that tax in full.

Rent, dividends and gains

Rent. India taxes net rent: the annual value less municipal tax actually paid, then a standard deduction of 30% of the annual value and interest on a loan used for the property (Income-tax Act, 2025, sections 21 and 22; formerly sections 23 and 24). A tenant who pays an NRI landlord is expected to deduct tax at source, again at "rates in force". On the US side the same rent goes on Schedule E, with depreciation over 30 years because the property is outside the US (IRS Publication 946). The Indian tax on rent can be credited, and a US landlord abroad normally files Form 1116.

Dividends. Section 207 of the 2025 Act taxes dividends paid to non-residents at 20%, and the India-US treaty (Article 10) allows up to 25% for an individual. The domestic rate is the lower one, so it is the one that applies. It is withheld by the company or the broker, and it is creditable.

Gains. Article 13 of the treaty lets each country tax gains under its own law, so both do. The Indian tax on the sale is creditable, but the two gains are different numbers because the US measures cost and price in dollars at each date's exchange rate. For a property sale, see chapter 4.

The shortcut that probably does not apply. The IRS lets you skip Form 1116 if your creditable foreign tax is no more than $300 (single) and all of it is passive income reported on a payee statement. Whether an Indian bank's interest certificate counts as a payee statement is doubtful, so plan on Form 1116.

Keep a file for each year

The credit has to be supported. For every Indian income stream keep:

• the bank or broker certificate showing gross income and tax deducted, by calendar year;
• the date and rate used to convert each amount;
• the Indian return and its assessment or refund record;
• any residency certificate you gave the bank.