5 Tax Mistakes Every NRI Makes (and How to Avoid Them)

You have Rs 20,00,000 in an SBI Bluechip Fund. Great returns. But the IRS classifies every Indian mutual fund as a Passive Foreign Investment Company (PFIC) under IRC Sections 1291-1298. That means your gains are not taxed at the favorable 15-20% long-term capital gains rate. Instead, they are taxed at the highest marginal rate (37% for 2024) plus an interest charge for each year you held the fund.

On a $5,000 gain held for 5 years, a regular US mutual fund would cost you about $750 in tax. The same gain on an Indian mutual fund? Roughly $2,000-2,500 after the Section 1291 excess distribution method kicks in.

Worse, you must file Form 8621 for each PFIC you own, every year. Five mutual funds means five forms. Most NRIs do not even know this requirement exists, and the statute of limitations stays open until you file.

**How to avoid it:** Do not buy Indian mutual funds while you are a US tax resident. Use US-listed ETFs like iShares MSCI India ETF (INDA) or WisdomTree India Earnings Fund (EPI) for Indian market exposure. Same returns, no PFIC headache. If you already hold Indian MFs, use our PFIC Exposure Checker to assess the damage.

If the total value of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR (Foreign Bank Account Report, FinCEN 114). This includes your NRE account, NRO account, demat account, PPF, and even your Indian mutual fund folios. The aggregate matters, not individual accounts.

The penalty for non-willful failure to file: $10,000 per account per year. An NRI with 3 Indian accounts who misses 3 years of FBAR filing faces up to $90,000 in potential penalties. Willful violations are even worse: the greater of $100,000 or 50% of the account balance.

Separately, FATCA (Form 8938) requires reporting if your foreign assets exceed $50,000 (single) or $100,000 (married filing jointly) on the last day of the year. FATCA is filed with your tax return. FBAR is filed separately at FinCEN BSA E-Filing by April 15 (auto-extended to October 15).

**How to avoid it:** File FBAR every year if your Indian accounts collectively exceed $10,000 at any point. File Form 8938 if you meet the asset thresholds. Both are informational returns with no tax due, but the penalties for not filing are severe.

India deducts Tax Deducted at Source (TDS) on your NRO interest at 31.2% (Section 195, Income Tax Act). Your NRO fixed deposit earning Rs 1,00,000 in interest loses Rs 31,200 to TDS before you see a rupee. Then the US wants to tax the same interest at your marginal rate.

Here is where the India-US Double Taxation Avoidance Agreement (DTAA), specifically Article 23, saves you. You can claim a Foreign Tax Credit (FTC) on your US return using Form 1116 (IRC Section 901) for the taxes you already paid in India. The credit is the lesser of the India tax paid or the US tax on that specific income.

Example: Rs 1,00,000 NRO interest (~$1,200 at 83.50 rate). India TDS: $374 (31.2%). US tax at 24% bracket: $288. Your FTC is $288 (lesser of $374 and $288). Net US tax: $0. You overpaid in India, and the excess $86 in India tax is lost (you cannot get a refund from India for the excess over the DTAA rate, but you can file a lower withholding certificate under Section 197).

Many NRIs simply pay tax in both countries without claiming the credit, effectively paying 50%+ combined rates. Do not be that NRI.

**How to avoid it:** File Form 1116 with your US return every year you have Indian income. Use our Dual Tax Calculator to see exactly how much you save.

India withholds 31.2% TDS on NRO interest and rental income (30% + 4% health and education cess under Section 195). But here is what most NRIs miss: the DTAA rate for interest is only 15% (Article 11), and for some income types you may qualify for lower rates.

If your total Indian income is below the basic exemption limit (Rs 3,00,000 for FY 2025-26), you can file an Indian tax return and claim a refund of the excess TDS. Even if your income is above the limit, you may owe less than 31.2% after deductions under Section 80C, 80D, etc.

For rental income specifically: TDS is deducted at 31.2% by the tenant, but your actual tax liability depends on your total Indian income. If the property is your only Indian income and it is below the exemption limit after standard deduction (30% of rental income under Section 24), you get a refund.

**How to avoid it:** File an Indian tax return every year you have Indian income, even if TDS was deducted. Apply for a lower TDS certificate (Section 197) if your actual tax rate is below 31.2%. For interest, request DTAA rate application (15% under Article 11) with your bank by providing a Tax Residency Certificate (TRC) from the US.

You have been in the US for 12 years and you are moving back to India. Your NRE fixed deposits are earning 7% interest, completely tax-free in India. The moment you convert to resident status and your NRE becomes a regular savings account, that interest becomes taxable at your slab rate (up to 30% + cess).

But here is what most returning NRIs do not know: under Section 6(6) of the Income Tax Act, if you have been a Non-Resident for 9 out of the preceding 10 years, you qualify for RNOR (Resident but Not Ordinarily Resident) status for 2-3 years. During RNOR, your foreign income (US salary, 401(k) withdrawals, US rental income) is not taxable in India.

The smart play: let your NRE fixed deposits run until maturity even after returning. NRE FDs continue at the contracted rate until maturity. Time your return so that high-interest NRE FDs mature during your RNOR window, when the interest may still not be taxable (consult your CA on the specifics, as this depends on whether interest accrued during NRI period).

**How to avoid it:** Do not rush to convert accounts. Use our Return to India Tax Planner to calculate your RNOR window and build a conversion timeline. Plan your return date around NRE FD maturity dates.