Understanding US Tax Obligations for NRIs & US Persons
US tax laws apply based on both residency and citizenship. A “US Person” includes US citizens, Green Card holders,
and individuals meeting the Substantial Presence Test (SPT). Such persons are required to file US tax returns
and report their global income, regardless of where they reside.
US Tax Residency Rules
Citizens, Green Card holders, and individuals meeting the Substantial Presence Test must report global income.
Gift & Estate Tax
US persons may be liable for gift and estate tax on worldwide assets. Generous exemptions apply but reporting is mandatory.
Taxation of Indian Mutual Funds (PFIC)
Most Indian mutual funds classify as PFICs and may attract US tax on notional gains under Form 8621.
1. Who Is Considered a US Person?
- US Citizens
- Green Card Holders
- Individuals meeting Substantial Presence Test
Substantial Presence Test is met if:
• Present in US at least 31 days in the current year, AND
• 183 weighted days in the last 3 years (all days in current year + 1/3 of previous year + 1/6 of year before).
2. Key Changes Under Tax Cuts and Jobs Act
- Revised Federal tax slab rates
- Increase in Standard Deduction
- Higher Estate Tax Exemption
- Deemed Repatriation Tax on foreign accumulated profits
3. US Tax Filing Requirements
- US Persons must file returns on global income
- Calendar-year reporting
- Federal due dates: 15 April (regular) / 15 October (extension)
- US expats get automatic extension until 15 June
- Married persons can file jointly or separately
- Foreign Earned Income Exclusion up to USD 112,000 (2023)
4. Gift Tax & Estate Tax
- Gift tax applies even when gifting to non-US persons
- Annual exemption: $17,000 per recipient (2023)
- Lifetime exemption: $12.92 million (2023)
- Gift tax return: Form 709
- Estate Tax return: Form 706 (due within 9 months of death)
- US persons receiving gifts > $100,000 from non-US persons must file Form 3520
5. PFIC Rules for Indian Mutual Funds
Most Indian Mutual Funds are treated as PFICs in the US, attracting notional taxation under Form 8621.
You may choose from:
- Mark-to-Market Method – Annual notional gain taxed as ordinary income
- QEF Election – Taxed on share of actual fund income (requires AMC cooperation)
- Excess Distribution Method – Default and most punitive
6. US Reporting Requirements
- Form 8938 (FATCA)
- FBAR (FinCEN Form 114)
- Form 8621 (PFIC)
- Form 3520 / 3520-A (foreign gifts & trusts)
- Form 5471 (foreign companies)
- Form 8865 (foreign partnerships)
Some assets reported on other forms need not be duplicated in Form 8938, but their values must be included for threshold calculation.
7. Consequences of Non-Compliance
- Significant civil penalties
- Possible criminal prosecution
- IRS amnesty options available for voluntary correction