Tax Mistakes Indian Expats
For Indian expats, the transition to the U.S. tax system is often more complex than expected. While most people focus on their U.S. salary, the IRS focuses on your global financial footprint. Minor oversights regarding your Indian assets can lead to “non-willful” penalties that quickly escalate into six-figure liabilities.
Here are the most common tax traps our Indian clients face and how to avoid them in 2026.
1. Treating FBAR as “Optional”
The most frequent mistake is failing to file the Foreign Bank Account Report (FBAR). Many assume that if they haven’t earned income in India, they don’t need to report the accounts.
- The Reality: If the combined maximum balance of all your Indian accounts (NRE, NRO, PPF, and even Fixed Deposits) exceeded $10,000 at any point in 2025, you must file.
- The Trap: The $10,000 threshold is an aggregate total. If you have five accounts with $2,100 each, you have triggered the requirement.
- The Cost: Penalties for “non-willful” failure to file start at $10,000 per violation.
2. Omitting Indian Interest and Dividends
Many Indian expats believe that because their Indian bank already deducted tax (TDS) on interest or dividends, they don’t need to report it to the IRS.
- The Reality: As a U.S. tax resident, you must report gross income from all sources. You can use the Foreign Tax Credit (Form 1116) to avoid paying tax twice, but you cannot simply omit the income.
- Commonly Forgotten Income:
- Interest on NRE accounts (which is tax-free in India but fully taxable in the U.S.).
- Dividends from Indian stocks or mutual funds.
- Accrued interest on Fixed Deposits (FDs) even if not yet withdrawn.
3. The “Passive Foreign Investment Company” (PFIC) Disaster
Most Indian mutual funds are classified as PFICs by the IRS. These are subject to an extremely punitive tax regime compared to U.S.-based mutual funds.
- The Mistake: Investing in Indian SIPs or mutual funds while a U.S. resident without filing Form 8621.
- The Consequence: You could face tax rates as high as 50% or more on gains, plus interest charges dating back to the first year of the investment.
4. Mismanaging NRE/NRO Account Status
Once you become a U.S. resident, Indian law (FEMA) requires you to convert your resident savings accounts into NRO (Non-Resident Ordinary) or NRE (Non-Resident External) accounts.
- The Mistake: Continuing to operate a standard Indian savings account.
- The Risk: Beyond IRS issues, this is a violation of the Foreign Exchange Management Act (FEMA) in India, which can lead to separate penalties from Indian authorities.
5. Forgetting “Signature Authority”
You may not own an account, but if you have your name on a parent’s or sibling’s account in India as a “joint holder” or have “power of attorney,” you may have signature authority.
- The Requirement: Accounts where you have signature authority must be disclosed on your FBAR, even if the money in the account is not yours.
How KKCA Secures Your Global Status
The IRS has significantly increased its use of AI to cross-reference data from foreign banks. At KKCA, we help you stay ahead of the curve:
- Streamlined Disclosures: If you’ve missed previous years, we use the IRS Streamlined Procedures to bring you into compliance without massive penalties.
- DTAA Optimization: We ensure you get full credit for taxes paid in India (TDS) so you never pay the same dollar twice.
- FEMA Compliance: We advise on the proper structuring of your Indian accounts to satisfy both U.S. and Indian law.
Contact
Looking for personalized tax services about your specific tax situation, please contact us. We are here to help you with your specific tax matters.
Disclaimer
This blog is intended for informational purposes only and does not constitute legal or tax advice. Please consult a qualified U.S. CPA or tax attorney for guidance specific to your situation.