NRI Tax 101: Residency, FBAR and FATCA Without the Jargon

Residency decides which income the US taxes

For US tax purposes, individuals are generally either 'resident aliens' or 'nonresident aliens', and the distinction drives everything. A resident alien is generally taxed on worldwide income — including income from India — while a nonresident alien is generally taxed only on US-source income. Note that 'resident for tax purposes' is a tax concept and is not the same as your immigration status.

Residency for tax purposes is determined by two tests. The green-card test treats lawful permanent residents as resident aliens. The substantial presence test is a day-count formula: you generally meet it if you were present in the US at least 31 days in the current year and 183 days over a three-year period, counting all days this year, one-third of last year's days, and one-sixth of the days from the year before. The IRS page on the substantial presence test sets out the exact rules and exceptions.

Two wrinkles affect newcomers. Certain people are 'exempt individuals' whose days do not count toward substantial presence for a period — for example, students in F or J status for a set number of years — which often makes them nonresident aliens at first. And people who arrive partway through a year can be 'dual-status', treated as a nonresident for part of the year and a resident for the rest, which is one of the more complex filings and frequently justifies professional help.

FBAR: reporting foreign accounts to FinCEN

The FBAR (Report of Foreign Bank and Financial Accounts, FinCEN Form 114) is required of US persons who have a financial interest in, or signature authority over, foreign financial accounts if the aggregate value of those accounts exceeded $10,000 at any time during the calendar year. This is a single, long-standing flat threshold that applies across all your foreign accounts combined — there is no separate threshold by filing status or where you live.

Key features: the FBAR is filed electronically with the Financial Crimes Enforcement Network (FinCEN), a Treasury bureau — not with the IRS, and not attached to your tax return. Accounts that commonly count for Indians include savings and current accounts, fixed deposits, PPF, demat accounts, and certain other financial accounts. Because it aggregates across all accounts, a set of individually small accounts can cross the threshold together. Confirm current filing details on the FinCEN BSA e-filing site and the IRS FBAR page.

FATCA: Form 8938 with your tax return

Separately, FATCA requires certain taxpayers to report 'specified foreign financial assets' on Form 8938, which is attached to your federal income tax return. Unlike the FBAR's single threshold, the Form 8938 reporting thresholds vary based on your filing status and on whether you live in the United States or abroad, and are higher for those living abroad and for joint filers. Because there are several tiers, check the current thresholds on the IRS Form 8938 page rather than assuming a single figure.

Form 8938 covers a broader set of assets than the FBAR — for instance, it can include directly held foreign stock or interests in foreign entities that the FBAR does not capture. It overlaps with the FBAR but does not replace it; many people who file one must file the other. The IRS publishes a side-by-side comparison of the two.

FBAR vs Form 8938: how they differ

Think of them as two overlapping circles. Filed with whom: the FBAR goes to FinCEN; Form 8938 goes to the IRS with your return. Threshold: the FBAR uses one flat aggregate figure; Form 8938 uses tiered thresholds that depend on filing status and residence. Scope: Form 8938 reaches a broader asset base. Because the definitions and thresholds differ, an account can be reportable on one form and not the other, or on both. The safest approach is to inventory your foreign accounts and assets once a year and test them against each form's current rules.

Both are primarily information reports — filing them usually does not by itself create additional tax — but the penalty regimes for failing to file can be significant and are enforced. That is why the goal is simply to report accurately and on time.

Indian income the US may still tax

For resident aliens, income earned in India is generally part of US taxable income even if tax was already deducted in India. For example, interest on Indian fixed deposits and savings accounts is generally taxable in the US for a resident alien, even where Indian TDS (tax deducted at source) applied. The India–US tax treaty and the US foreign tax credit are the mechanisms that prevent the same income being fully taxed twice — but they work through reporting and claiming credits, not through leaving income off the return.

This is a common and costly misunderstanding: 'tax was already taken in India' does not remove the US reporting obligation for a US tax resident. How the treaty and foreign tax credit apply to your specific income is fact-specific; a cross-border tax professional can confirm the correct treatment.

The PFIC trap and state taxes

Indian mutual funds (and certain other pooled investments) can fall under the US 'passive foreign investment company' (PFIC) rules, which impose a complex and often unfavourable US tax and reporting regime, generally on Form 8621. Because the consequences can be significant, it is worth getting advice before you sell such holdings — and ideally before you become a US tax resident — rather than after.

Do not overlook state taxes. Many US states levy their own income tax with their own rules, and states are not parties to the India–US tax treaty, so treaty relief that applies at the federal level may not apply at the state level. Check the rules for the state where you are a resident.

The filing calendar and the paperwork

A typical year: in January and February, income documents arrive — Form W-2 for wages, Form 1099-INT for interest, and consolidated 1099s from brokerages. You then file your federal income tax return (and any state return) by the applicable spring deadline, attaching Form 8938 if you meet its thresholds. The FBAR is filed separately with FinCEN; its deadline is aligned with the tax-filing season and an automatic extension is generally available — confirm the current dates on the FinCEN and IRS pages.

A simple annual ritual removes most of the stress: once a year, list every Indian financial account (bank, fixed deposits, PPF, demat, and insurance policies with a cash value), note the highest balance each reached during the year, and convert using the appropriate official year-end exchange rate. That single list feeds both the FBAR and Form 8938.

Special situations to flag early

A few circumstances are complex enough that they are worth identifying before you file, ideally with professional help. The year you arrive can be a dual-status year, splitting the year into nonresident and resident parts with different rules for each. In some situations, a first-year residency choice or an election to be treated as a resident can be available and can change your filing — these have specific conditions set out in IRS Publication 519.

Where a person could be considered a tax resident of both countries, the India–US tax treaty contains 'tie-breaker' rules that determine residency for treaty purposes; applying them correctly is technical. And if you hold Indian mutual funds or other pooled investments, the PFIC rules noted above can require additional forms. None of these are reasons to panic — they are simply flags that your return is not routine and that qualified advice is likely to pay for itself.

Getting help, and avoiding preparer scams

There are legitimate, official resources. The IRS offers free filing options for those who qualify and runs the VITA program of free volunteer tax preparation for eligible taxpayers; university international offices often provide nonresident-specific filing software for students. For genuinely cross-border situations — dual-status years, treaty claims, PFICs, or significant foreign assets — a CPA or tax attorney experienced in India–US filings is usually the right call.

Avoid the common traps. 'Ghost preparers' who prepare a return but refuse to sign it are a documented problem the IRS warns about each year — a paid preparer is required to sign and include their identifying number. Be wary of anyone promising a specific refund before reviewing your documents, and remember that the IRS generally initiates contact by mail, not by threatening phone calls, texts, or demands for payment by gift card or wire. When in doubt, verify through the official IRS channels.

A note on the India side

US tax obligations do not remove your Indian ones — the two systems run in parallel and each decides residency on its own terms. India determines an individual's residential status largely by day-count rules for the relevant year, which affect how your Indian income is taxed there; the categories and thresholds are set by Indian law and administered by the Income Tax Department of India. Your status can differ between the two countries in the same period.

This is exactly where the India–US tax treaty and the foreign tax credit matter, because they are the tools that stop the same income being fully taxed in both places. Coordinating the two returns — and the timing of income, sales of assets, and account closures around a move — is a common reason NRIs use a preparer who understands both systems. Confirm Indian rules with the Income Tax Department of India or an Indian tax professional, and US rules with the IRS.

Build a cross-border archive

Keep one organized archive and add to it every year: your US returns with W-2s and 1099s; your Indian returns and Form 26AS / AIS statements; year-end statements for every Indian account with peak balances noted; TDS certificates; and copies of the FBAR and Form 8938 filings themselves. Because both countries use day-count residency tests, keep evidence of your travel (a simple log, boarding passes, or passport stamps).

The archive pays off at predictable moments: claiming foreign tax credits, selling Indian property (buyer TDS paperwork can reach back years), inheritance and estate matters, and any residency question either tax authority raises. The consistent theme across all of this is the same: report accurately, keep records, and get qualified cross-border advice for anything non-routine.