I am an NRI who is a tax resident of USA. I use TurboTax to file my taxes. Irrespective of the filing software, can someone help me understand my tax liability as well as reporting for MF redemption?

I have questions like:

  1. How do I report this in TurboTax?
  2. How do I segregate between short term and long term tax?
  3. How do I report the tax I already paid in India and get credit for it?
  4. India has a different concept of short and long term taxes for NRIs. Are they applicable to me or do I still pay tax based on US laws?

Any help would be appreciated.

1 Answer 1

  1. As a tax resident of the US, you are required to report all interest income earned in India, whether from NRE or NRO accounts or from standard bank accounts that you, as a NonResident Indian (NRI), are still holding in India despite Indian laws prohibiting you from doing so, all dividend and capital gains distributions from mutual funds, all capital gains from selling of stocks, etc, everything, regardless of whether you received a 1099 Form for all these transactions or not (usually not). In TurboTax, you create a "fake" 1099 form listing all the information, converting payments in Indian rupees (INR) to US dollars at the exchange rate as of December 31 of the tax year. Note that you are also required to file a Form with the your tax return sent to the IRS (TurboTax will fill out the necessary paperwork for you if it is needed) and separately with the US Treasury, but one or both requirements are waived if the total value of your financial assets is "small" (less than US $10K during the entire year for the IRS Form).
  2. Mutual funds in the US divide capital gains distributions as short-term gains or long-term gains depending on when the fund sold the underlying securities (the investments made by the mutual fund on behalf of the shareholders), not as a function of how long you have held your mutual fund shares, and they make these distributions once a year, or semiannually. If mutual funds in India behave differently, then you need to wait for @Dheer to answer.
  3. TurboTax will ask you if you paid any foreign taxes, and you enter the taxes you paid during the US tax year in question regardless of whether the taxes covered an earlier period than the US tax year. That is, taxes paid during 2019, whether it is via tax deduction at source (TDS), or by quarterly self-assessment with payments deposited during 2019, or final settlement of income tax due that you paid in April 2019. TurboTax will fill out the appropriate IRS Form to give you credit for the tax paid to India. US taxpayers generally use calendar year tax periods which don't align with the Indian tax years, but most individuals are also cash basis tax payers and so you pay taxes on what you receive during the calendar year.
  4. Once again, you pay taxes in India as per Indian tax laws and get a credit for those payments (as a lump sum, not as capital gains income taxed separately from ordinary income etc) on your US tax return. That is, capital gains tax paid in India is not credited against only the capital gains tax due to the US but against your entire tax liability in the US. Note that interest income from NRE accounts is not taxable in India, but is taxable in the US, and you are supposed report this income along with interest income from NRO accounts which is taxable in India (and usually is subject to TDS). So you don't get credit on your US tax return for Indian taxes paid on NRE accounts because that income is tax-free in India but you do get credit on your US tax return for tax paid on interest from NRO accounts.
  • Thank you for your reply. Talking about Mutual Funds in India, If I sold a few units during the calendar year, during redemption I was charged tax based on short and long term capital gains(statement generated from the AMC). On this front, I have 2 questions: 1. Do I pay tax on the capital gains as per US tax laws(Equity MFs define long term as 1 year and are charged at 10%, so do I pay only 10% in the US or do I pay according to the US tax laws) ? 2. How do I report long and short term gains separately on MF redemptions?
    – Viraj
    Commented Feb 17, 2020 at 3:33
  • @Dheer, any information on my comment?
    – Viraj
    Commented Feb 24, 2020 at 2:11

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