How is the Interest Income from NRE and NRO accounts taxed in the US?

For NRIs who have shifted to the United States of America, there are usually two options when it comes to keeping their bank accounts active. They can either convert them into NRE or NRO accounts. Needless to say, your money in either of these accounts earns interest over a period of time. Thus, the first and foremost question that would crop into the mind of anyone is, whether or not this income is taxable. If yes, how to go about the same? Here are some easy steps that you can follow to ensure easy compliance and avoid being labelled as a tax evader.

Calculate Income

Income generated from any of the following means would qualify to be taxed in the United States of America.
  • Interest earned on NRE accounts.
  • Interest earned on NRO accounts.
  • Interest earned on NRE FD accounts.
  • Interest earned on NRO FD accounts.
  • Income generated from Mutual Funds in India, including any SIP’s (Systematic Investment Plan) that you might have.
You are liable to pay taxes on the above counts if you belong to any one of the following categories.
  • A holder of Green Card.
  • A Legal resident i.e. working on either an H1B, L1B, H4 EAD or any other work permits in the USA.
  • You are a PIO.
  • You are an OCI.

Dollar Amount Calculation

Once you have identified the income that might be taxed in the USA, it is now important to convert the same into dollars. The IRS publishes exchange treasury rates in the year-end. You can use these exchange rates to calculate your Indian income in dollars.

Taxes in India

If you hold an NRE account, you can breathe easy since Indian tax laws do not levy any taxes on the interests earned. Thus, banks will not deduct any amount from the interest earned. However, the interests earned on an NRO account is taxable at 30% along with applicable taxes.

Form 1040

To file your taxes in the USA, you need to fill Form 1040 and file it. You can either file your taxes on your own or take the help of professional services to do the same. The important thing to keep in mind during such transactions is to fill the Schedule B on your Form 1040. This includes the income that you have earned in India. You need to find out the total amount of tax (TDS in India) that banks have deducted from your accounts. Banks usually send a Form 16 in India which collates all this information.

Do Indian Banks Issue Form 1099-NT?

None of the Indian bank’s issue Form 1099-NT for the interest earned on your NRE or NRO accounts. Thus, you diligently have to file the information correctly in your Form 1040. As a matter of fact, none of the banks in the USA also issue Form 1099-NT, unless the interests earned is more than $10.

Do I have to Pay Taxes In the USA for the interests earned?

The simple answer is yes. You would need to pay taxes on the interests earned on your NRE or NRO accounts. Yet, if your bank has already deducted TDS from your account in India, you can claim the amount. You would need to declare that you have paid taxes to the Indian Government in your tax returns. If you wish to know the amount of interest that you have earned in your respective bank accounts, you should ask for bank statements. Indian banks usually credit interests once every quarter.