Common Challenges Faced by NRIs While Filing US Tax Returns

NRIs filing US tax returns commonly face challenges with residency, Indian income reporting, foreign accounts, investments, foreign tax credits, currency conversion, and the difference between Indian and US tax years. Understanding which US rules apply to your situation can help you identify the forms, records, and tax positions that need review.

Key Takeaways

• NRI is mainly an Indian tax and regulatory label, not a US tax filing status.

• A US tax resident generally reports qualifying worldwide income, including Indian rent, interest, dividends, and capital gains.

• FBAR and Form 8938 are separate foreign-account and asset reporting systems.

• Indian mutual funds can require additional US tax and information-reporting analysis.

• Indian taxes may be eligible for a US foreign tax credit when the applicable requirements are met.

• Indian income records, tax payment evidence, account statements, transaction dates, and exchange-rate records support accurate filing.

• Changes in residency, missed forms, PFIC investments, business interests, and treaty positions may require cross-border tax review.

What does NRI mean when you file a US tax return?

NRI status under Indian rules does not determine your US filing status. In the US, filing status depends on factors such as citizenship, a green card, physical presence, and other applicable tax-residency rules.

Indian tax residency uses India's own residency rules. You should review your Indian and US residency positions separately.

For calendar year 2025, the US substantial presence test generally requires at least 31 days of physical presence in the US during 2025 and 183 weighted days across 2025, 2024, and 2023. The calculation counts all 2025 days, one-third of 2024 days, and one-sixth of 2023 days, subject to applicable exceptions.

A person can therefore be resident in one country and nonresident in the other. The important point is that being an NRI under Indian rules does not automatically determine your US tax residency.

Does a US tax resident have to report income earned in India?

A US tax resident generally reports qualifying income from India on the US return, even when India has already taxed it. This can include Indian rent, bank interest, dividends, capital gains, pensions, and other taxable income.

You report the income under its relevant US category rather than simply copying the amount from an Indian tax return. Indian records can help establish the income, expenses, tax paid, and transaction dates.

Indian tax paid may be relevant when determining whether you can claim a foreign tax credit. It does not by itself replace the US income-reporting requirement.

Which US return should an NRI use: Form 1040 or Form 1040-NR?

A US resident alien generally uses Form 1040, while a nonresident alien generally uses Form 1040-NR. A person who changed residency during the year needs to review the dates and rules that apply to each part of the year.

For 2025 calendar-year returns, the regular federal filing deadline is April 15, 2026. Eligible US citizens and resident aliens living and working abroad may receive an automatic two-month extension, generally making June 15, 2026 the extended filing deadline. Interest can still apply to unpaid tax from the original April 15 deadline.

Example: Rahul moved from Pune to Texas on 3 July 2025 and returned to India for 40 days in December. He earned US salary, kept Pune rental income, and held Indian bank accounts. His US tax position cannot be determined simply from his Indian citizenship or NRI status. His US presence, residency rules, worldwide income, and foreign-account reporting requirements must be reviewed together.

If you have established which Indian return applies and need help filing it from abroad, SaveTaxs can help you file your Indian income-tax return.

When do Indian bank accounts need FBAR reporting?

Indian financial accounts require FBAR review when the aggregate value of qualifying foreign financial accounts exceeds the applicable reporting threshold.

For a US person, the general FBAR threshold is more than $10,000 in aggregate value at any time during the calendar year. FBAR is filed separately from the federal income-tax return.

The review may include NRE, NRO, FCNR, savings, fixed-deposit, brokerage, and other qualifying financial accounts. Keep the account number, institution name, ownership details, and maximum value for the year.

How is Form 8938 different from FBAR?

FBAR focuses on qualifying foreign financial accounts, while Form 8938 covers specified foreign financial assets under FATCA rules. The same financial account may need to be considered under both systems, depending on the applicable requirements and thresholds.

Form 8938 has separate reporting thresholds based on factors such as filing status and whether the taxpayer lives in the US or abroad.

Use a combined foreign-account and foreign-asset inventory when reviewing your reporting obligations. Filing one form does not automatically replace the other.

Why can Indian mutual funds and other investments create extra reporting?

Indian mutual funds can require additional US tax analysis because certain foreign pooled investments may fall under the PFIC rules. Form 8621 may be required when the applicable PFIC reporting rules are met.

Indian shares, pensions, insurance-linked investments, and brokerage holdings can have different US tax treatments. The key issue is identifying how each investment is classified under US rules rather than simply converting the Indian statement into dollars.

Example: Priya lives in New Jersey, holds Indian mutual funds and an Indian savings account, and paid Indian tax on rental income. Her rental income and Indian tax may be reviewed for foreign tax credit purposes, while her mutual funds require a separate PFIC and investment-reporting review. These are separate US tax questions.

Can Indian taxes be claimed as a US foreign tax credit?

Eligible Indian income taxes may support a US foreign tax credit, subject to the applicable requirements and limitations. Individuals generally use Form 1116 when required.

You generally report the relevant foreign income first and then determine the allowable US relief under the foreign tax credit rules. Keep Indian tax challans, tax computations, assessment records, and proof of payment.

The amount of foreign tax paid is not automatically the amount of credit available. The applicable income category, foreign-source income, and US foreign tax credit limitation must also be considered.

Does the India-US tax treaty override US filing rules?

The India-US tax treaty provides rules that can affect the taxation of certain income and relief from double taxation. Treaty analysis depends on the type of income, residence position, and the specific treaty provision involved.

A treaty position should be connected to the specific income or tax issue being addressed. Foreign-account and information-reporting requirements should also be reviewed separately where applicable.

How should Indian income be converted into US dollars?

Indian income, taxes, account values, and transactions reported on a US return generally need to be converted into US dollars using a supportable exchange-rate method.

The IRS does not have one official exchange rate for all purposes. It generally accepts a posted exchange rate used consistently, subject to the applicable facts and circumstances. A yearly average rate may be appropriate for some recurring income, while transaction-specific rates may be relevant for individual transactions.

Keep the exchange-rate source and calculation with your tax records.

How do India's financial year and the US tax year affect filing?

India's April–March financial year does not align with the US calendar tax year. As a result, Indian statements and tax records may cover periods that do not directly match the US tax year.

Match receipts, payments, sales, and tax payments to the period in which US tax rules recognize them. Do not simply copy an Indian annual total into the US return without reconciling the relevant dates.

How are Indian rent, gains, dividends, and interest reported?

Indian rent, interest, dividends, and capital gains are generally reported according to their applicable US income category and converted into US dollars.

Rental income requires property income and expense records. Capital gains require purchase and sale information and basis records. Dividends and interest require payer statements and payment dates.

Treating every Indian receipt as one general “foreign income” figure can make it difficult to apply the correct US reporting rules.

What records should you collect before filing?

Collect:

• US wage and investment statements

• Indian rental-income and expense records

• Indian bank and deposit statements

• Mutual fund and share statements

• Pension information

• Indian tax payment records

• Account ownership details

• Transaction dates

• Prior US tax returns

• Foreign-account maximum balance records

• Exchange-rate sources and calculations

Also review whether FBAR, Form 8938, Form 8621, Form 1116, or other applicable forms were required in earlier years.

If a prior filing omitted income or information, determine whether a corrective filing or other response is required based on the circumstances.

When should you use professional cross-border help?

Cross-border tax review can be useful when you have Indian mutual funds, part-year or changing residency, a business, complex investments, previously missed forms, or a treaty position that requires analysis.

The review should consider income reporting, foreign accounts, investment classifications, foreign tax credits, and applicable treaty provisions together rather than treating each issue separately.

Conclusion

Start by establishing your US and Indian residency positions for the relevant year. Then organize your income records, foreign-account balances, investment statements, Indian tax-payment evidence, and exchange-rate calculations before selecting the applicable forms.

The issues that can materially change the filing analysis include a change in US tax residency during the year, foreign financial accounts, Indian mutual funds or other pooled investments, and the type of Indian income involved.

Official Sources

• IRS — Substantial Presence Test

• IRS — U.S. Citizens and Resident Aliens Abroad: Automatic 2-Month Extension

• IRS — FBAR Reporting

• IRS — Form 8938 / FATCA Reporting

• IRS — Foreign Tax Credit

• IRS — Foreign Currency Exchange Rates

• IRS — U.S.-India Income Tax Treaty