Is NRO/ NRE/ FCNR Interest taxable in the US?
NRO/NRE/FCNR ,With more and more people shifting to the US for a better future, the above question becomes even more pertinent. Are the interests earned from NRO/NRE/FCNR accounts taxable in the USA?
The simple answer to the question is Yes. The interests that you earn from such accounts is taxable in the USA. However, it is not as simple as it might sound and it as a complete process that you must follow.
The following steps will help you ensure that you are able to determine the income from other sources such as NRO/NRE/FCNR accounts earning interest. And that the income is taxed appropriately so that it doesn’t come to bite you at a later date.
Any income generated from the above means is taxable in the USA if you are a US person. Thus, the first step involves determining whether or not you are a US person. You must meet any of the following conditions for the same.
- Are a citizen of the USA.
- Are a former legal permanent resident but due to some reasons wasn’t properly expatriated.
- Are a legal permanent resident.
- Are a national of another country but have cleared the Substantial Presence Test.
In short, if you are a Green Card holder, OCI, PIO or a legal resident of the USA (holding L1B, H1B, H4 EAD or other work visas of the USA)you must pay taxes on the above-mentioned income.
Every year the IRS publishes the year-end treasure rates for various currencies. These can hold as a good starting point to consider the conversion rate. You can use this rate to convert your Indian income from NRO/NRE accounts into the US Dollar.
For example, if you have earned about INR 15,000 as interest from your NRO/NRE account, and consider an exchange rate of 75, the dollar equivalent would be $200. INR 150,000/72 = $200.
You can then use this amount for tax purposes.
Taxes in India
Any interests that you earn on NRE accounts is not taxable in India. This means that banks will not deduct any amount from your earnings directly.
Similarly, any interests that you earn on your FCNR account is not taxable in India.
However, things change a little bit when it comes to NRO accounts. Any interests that you earn on NRO accounts are charged at 30% plus applicable taxes.
Depending on how your bank operates, it can either be deducted from your account directly, or you might have to file at the end of the year.
Taxes in the USA
Once you are a US person, you are expected to file your taxes and returns. In other words, you will have to file Form 1040 using any of the tax filing services or directly with the IRS.
Irrespective of which method you use, it is important that you fill the Schedule B in the Form 1040. Schedule B includes the income generated from your Indian assets or accounts.
In case you have paid taxes in India, you would need to mention that in your tax returns. This is applicable for NRO accounts. As far as NRE and FCNR accounts go, you will have to mention the income from the accounts and that will be added to your annual income in the USA for the fiscal year.
For the year 2016, as many as 21,428,230 filings were there for Schedule B out of which 18,781,052 were electronically filed.
Depending on the tax bracket that you are a part of, you will have to pay appropriate taxes. And for the taxes that you have paid in India, the DTAA will ensure that you do not pay taxes twice.