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

by Mounica Kota | Mar 15, 2019 | NRE, NRO, Tax Extension, Tax Planning, Tax Preparation, taxes

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.

How to account for the NRE and NRO interest and FD while filing for your US taxes

by Mounica Kota | Nov 26, 2018 | Blog, Investment & Income, NRO, tax savings

How to account for the NRE and NRO interest and FD while filing for your US taxes?

According to the data available with the Indian Ministry, India ranks second among all countries for citizens who have temporarily or permanently shifted to other countries. NRE Interest The number stands at a staggering 25 million across some of the most prominent countries around the globe. And this is where the concept of NRI comes into the picture. An NRI or Non-Resident Indian is any individual who has an Indian passport and has emigrated to a different country.

This is mostly on a temporary basis either for education, residence, work or other purposes. Thus, it is extremely important to understand the different taxes that an NRI is liable to pay, so as to remain clear of both the countries. To make matters a bit easier, the Indian government allows for two types of accounts for NRI’s, namely NRO and NRE.

And depending on your residential status, you with either be taxed on your global income or income in just one country. In case, you are an NRI and receive all your income in the USA, you will be taxed on in the USA. However, if you are a resident of India, then you will be taxed on your global income. To make matters a bit easier, the Indian government allows for two types of accounts for NRI’s, namely NRO and NRE.

NRE account can be opened by depositing foreign currency. While an NRO account can be created before leaving the country with the intention of being an NRI. In either case, an individual will earn some interest on the amount deposited in the account. Thus, the most common question among NRI’s is how to account for the interest earned on NRE and NRO accounts or even Fixed Deposits that they have in their accounts.

This is where the water gets a bit muddy. There are different schools of thoughts, where some do feel there is a need to declare the interests earned on the above fronts, while others feel it is necessary to do the same. The latter is a more preferable situation to be in.

Any interest that you earn from your NRE or NRO account or even Fixed Deposits for that matter is taxable. And you must not forget to include the same while your US taxes. The same is applicable for any dividends that you earn.

Fixed Deposit acts like a capital asset, where you invest a certain amount of money and receive yearly interest on the same. Thus, its maturity is similar to selling any other capital asset, as you make money out of it. The interest adds to the base amount and thus the taxation comes into the picture. For the interest that you have earned either on FDs or NRO or NRE accounts, you must first convert the same into USD for the financial in contention.

Once you are done with the conversion, make sure to add it in the Form 1099-INT and then file your taxes. However, one must be careful with the tax rates. For instance, the interest that you have earned is INR 25,000 and you end up paying the 20% taxes to the Indian government. If you tax slab is 40% in the United States, you must pay the additional 20% taxes to the IRS. And this is in accordance to the DTAA or Direct Tax Avoidance Agreement between the two countries.If you are an NRI, you most probably have an NRO or NRE account with any of the leading banks in India. It is important to disclose the interests earned from these accounts in your tax returns to avoid any form of discrepancies and to ensure a smoother tax filing season.