Reporting Mistakes NRIs Make With USD Investments

For NRIs holding USD investments, be it in real estate, American brokerage accounts, retirement funds, or bank deposits, the tax season can feel overwhelming. This is because, on the one hand, it is the US tax code, whereas on the other hand, it is India's foreign asset disclosure frameworks. And if you miss even a single step on either side, it can lead to unnecessary financial stress, notices, and penalties. 

However, the good news is that most of these reporting mistakes are avoidable. Hence, in this blog, we will take a detailed look at the most common reporting mistakes NRIs make with USD investments and how to keep them at bay. 

Assuming NRI Residential Status Exempts You From Indian Disclosures

This is one of the most common misconceptions among NRIs with USD investments. If you think your foreign investments are invisible to Indian tax authorities because you hold an NRI status, it is partially wrong. 

If you are an NRI who has just returned to India and is now a Resident and Ordinarily Resident (ROR), you are required to disclose your global income and assets, which include your USD-denominated investments, in your ITR. Many NRIs continue filing their ITRs without disclosing their USD investments, thinking they are still non-residents, but this is where they go wrong. 

The foreign asset (FA) schedule in the ITR is mandatory for RORs and must include your bank and brokerage accounts, retirement funds such as 401(k) and IRA, real estate and life insurance policies, and real estate held abroad. 

Even the NRIs who have partially returned- spending significant time in India may have crossed the residency threshold under the 182-day or 120-day rule and trigger full disclosure obligations without realizing it. 

Not Reporting FBAR (FinCEN 114) When Required

If you are a US person, a green card holder, or someone meeting the substantial presence test, and your foreign financial accounts (including Indian NRE/NRO accounts) have collectively exceeded the threshold of $10,000 at any point in the calendar year, you must file the foreign bank account report (FBAR) with FinCEN by April 15. 

Quite a few NRIs think that FBAR is only for Americans or that accounts in India do not count as foreign from the US standpoint. Both of these assumptions are wrong. The FBAR applies to any account outside the United States, and the penalties for non-compliance are quite high. 

Furthermore, please know that FBAR filing is separate from your tax return and must be filed even if no tax is owed. 

Ignoring FATCA & Form 8938

Alongside the FBAR, the Foreign Account Tax Compliance Act (FATCA) requires US taxpayers to report specified foreign financial assets on Form 8938, filed with the federal tax return. However, the filing threshold is higher, starting at $50,000 for single filers residing in the US. 

A common error is filing Form 8938 without filing FBAR, or vice versa. These are two separate requirements with overlapping but no same scope. Brokerage accounts, US mutual funds, and even an interest in foreign partnerships must be disclosed under the FATCA. 

As a US-based NRI, if you fail to file Form 8938, you will incur a $10,000 penalty, with additional penalties of up to $50,000 for continued non-compliance after the IRS notification. 

Incorrect Or Missed Reporting Of Capital Gains

USD investments, specifically mutual funds and equities, generate capital gains that must be correctly reported in both the USA and India. 

The mistakes here are numerous: 

Using the wrong cost basis: NRIs at times report gains using the original USA purchase price and convert them to INR at the prevailing exchange rate on the purchase date. The gains must then be calculated in INR using RBI reference rates for the Indian tax purpose. 

Conflating Short & Long Term Gains: In the US, long-term gains (assets held for more than one year) are taxed at preferential rates of 0%, 15%, or 20%. Whereas in India, the holding period thresholds differ by asset class. When you mix these up, it results in miscategorization and incorrect tax computation. 

Forgetting State Taxes: NRIs who are residents of the United States in high-tax states such as New York or California often overlook state-level capital gains taxes in their planning, which can materially increase the overall tax burden depending on the taxpayer’s state of residence. 

Double Taxation Without Claiming Treaty Relief

India and the US have a double taxation avoidance agreement (DTAA). Despite this, a surprising number of NRIs generally pay taxes in both countries without claiming the exemptions or credits to which they are entitled. 

For example, eligible Indian residents may claim reduced withholding tax rates on US stock dividends under the India-US DTAA, subject to proper treaty documentation such as Form W-8BEN. Taxes paid in the US can be claimed as FTC in India, reducing the Indian tax liability on the same source of income. 

Such errors often occur because taxpayers are unaware of the DTAA provision or because the required forms, such as Form 67 in India (required to claim FTC), are not filed within the prescribed time. 

Failing To Update The Residential Status With Brokers & banks

As an NRI, when your residential stays are interrupted by becoming a US resident upon returning to India, then you must update the status with your financial institution. Failing to do so can lead to mismatched tax records and incorrect tax withholding, which generally trigger audits.

For example, if a US broker continues to treat you as a non-resident alien after you have received a green card or are a US citizen, the reporting forms for you will be incorrect. Likewise, with Indian banks, the account holder must be notified when an NRE or NRO account holder returns to India permanently, and the account must be re-designated accordingly. 

The Bottom Line

USD investments offer NRIs powerful wealth-building opportunities, but the reporting framework around them is genuinely complicated. The consequences of errors range from penalties and interest to criminal charges in extreme cases of wilful tax evasion.

For NRIs to comply with India's and the US's filing requirements for USD investments, professional assistance is necessary. And when it comes to NRI investment professional assistance, Savetaxs is the name to trust. We have a dedicated team of CAs and CPAs working for you, ensuring your USD investments are accurately maintained and are in compliance. 

Connect with us as we serve our clients 24/7 across all time zones.