Understanding IRS Forms for NRE/NRO Account Reporting

As an NRI living in the United States, one of the most common questions that might wander into your mind would definitely be: "If my NRE account is tax-free in India, do I still need to file about it with the IRS?"?. The simple answer to this is yes. Yes, you almost always have to tell the IRS about it. The US tax system and the Indian tax system are completely different, and tax benefits or breaks in one do not necessarily carry over to the other.

In this blog, we will understand NRE and NRO account reporting to the IRS, among other topics.

Who Does This Apply To?

The forms are applicable to persons living in the United States, such as green card holders and U.S. citizens, who also hold NRO and NRE accounts in India. Now this relates to a lot of people, such as NRIs who were once working in the US and attained a green card, a child of Indian parents born in the USA, or a naturalized citizen who keeps their Indian bank accounts active.

If any of the aforementioned individual categories applies to you, the IRS will treat your Indian bank account as a foreign financial account, regardless of what Indian taxes it and how.

A Myth - "The NRE Interest Is Tax Free In India, So I Do Not Have To Report It To The IRS"

The myth here is that many taxpayers think the NRE account interest is tax-free in India, so it does not need to be reported on their US tax return.

But the fact is, the Indian tax exemption on NRE interest applies only to India. The US tax system treats this NRE interest in its own way: it is generally fully taxable US income for a US person and must be reported every year, regardless of what India does with it.

For NRIs, it is natural to assume that tax-free means tax-free everywhere. But you should also understand that every country has its own tax rules and tax authorities. India does not set taxes for the United States. So if India decides that the NRE interest will be tax-free, it does not necessarily mean the US will also not tax this.

NRE vs NRO Accounts - How Are These Accounts Treated In The US?

The US treats NRE and NRO accounts as original foreign bank accounts that hold taxable interest. Whereas for India these two accounts are treated differently. In the following table, we will demonstrate the tax treatment of the receiving account in the respective countries, namely India and the US.

Which US Tax Forms May Apply For?

The following are the applicable US tax forms:

Reporting Interest Itself: Schedule B (With Form 1040)

Now that Indian banks do not send the IRS a Form 1099 form as US banks do. Here, you are responsible for calculating and summing the interest yourself and reporting it on Schedule B, which is attached to your regular Form 1040. This treatment applies to both NRE and NRO accounts because the Indian tax-free label on NRE interest does not create an exemption here.

Claiming Credit For Indian Tax Already Paid: Form 1116

In India, the interest on NRO accounts is already taxed at the source. Now, if you file for this in the US, Form 1116 lets you claim a US tax credit for the NRO interest you have already paid in India, so you are not taxed twice. Whereas the NRE interest is not taxed in India in the first place, hence it has no US tax credit to claim. So, this form matters more for an NRO account than it matters for an NRE account.

Reporting Account's Existence: FBAR (FinCEN Form 114)

Reporting the existence of the account is different from reporting the income. This means that you are reporting that ues the account exists. Now, across all your foreign bank accounts, the combined balance exceeds the threshold of $10,000 at any point during the year you need to file an FBAR. The FBAR is filed with the official Treasury Department and not with the IRS, as it is not attached to your tax return.

Reporting The Larger Foreign Assets - Form 8938

In case your total specified foreign financial assets cross a higher threshold, somewhere around $200,000 for someone living abroad. This could be higher for couples; you may also need to file Form 8938, attached to your actual tax return. Many taxpayers end up filing both the FBAR and Form 8938 in the same year for the same accounts.

FBAR vs Form 8938: What Is The Difference?

The following table demonstrates the clear difference between the FBAR and Form 8938.

Here is an important update: Filing one does not automatically replace the others. As a US taxpayer with NRE, NRO, FCNR, and other foreign accounts, you may need to file both FBAR and Form 8938.

Common Mistakes To Avoid

• The very first and most common mistake is to assume that the NRE Indian tax exemptions are applicable to the US too; it just does not work that way.
• Waiting to get a 1099 form from the Indian bank account because it won't come. You are to annual activities and report the interest year-wise.
• Filing the FBAR but forgetting that Form 8938 exists, or because it won't come. You are to report annual activities and report the interest year-wise. Both have different purposes and thresholds, and depending on the individual's circumstances, some may even have to file both.
• Not claiming Form 1116 credit for the NRO tax that you have already paid in India. Skipping this part means you are paying the tax twice on the same interest or rental income.
• When you assume that if the account balance is minimum, there is no need for reporting. Well, with FBAR, it does not work that way, as the combined total applies to all foreign accounts, not per account.

A Quick Checklist

The following is a quick checklist pointing out what you, as an NRI in the US, must take care of. Confirm any year-end United States taxes for tax purposes. This means whether you are a citizen or a green card holder.

• Add up the NRO and the NRE interest for the entire tax year and then report the same on Schedule B of the form.
• To claim the credit for the tax saved on the NRO income in India, use Form 1116.
• Check your combined foreign account balances against the FBAR threshold of $10,000.
• Check your total specified foreign financial assets against the Form 8938 thresholds that apply to your filing status and whether you live in the U.S. or qualify as living abroad. The threshold can depend on both the year-end value and the maximum value during the year.
• Do not assume that just because India offers tax exemption on the NRE accounts, it will change anything on the US side.
• Keep all your account statements handy, as India will not automatically send you the US tax form.

The Bottom Line

As an NRI living in the United States, if you have an NRE or NRO account in India, it does not mean that it won't be reported in the United States. As the NRE interest is tax-free in India, but in the United States it will be treated as taxable income. The NRO interest is also taxable in the United States, although you might be able to claim the credit for the Indian taxes you have already paid on the NRO income in India.

Just remember that reporting of the income and reporting of the account in India are two different things. This is because you need to report your interest in Schedule B, disclose your foreign accounts via the FBAR, and then, if you fulfill the applicable threshold, you would also need to file Form 8938. Keep receipts for your Indian balances and interest income, as this will make your filing process much easier.

If you are a green card holder or a US citizen and NRI with an Indian bank account, it is advisable to seek professional assistance. Among those to trust is Savetaxs, as our experts will help you understand your tax obligations and avoid any sort of reporting mistakes. Our experts will assist with NRE/NRO instruments requiring FBAR, Form 8938, Form 1116, Schedule B, and US-India tax compliance.

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