How much tax should I pay in US on interest earned on my NRE a/c in India?

Question

I am a person on H-1B who passes Substantial Presence Test. I have transferred money which I saved from my salary to my own NRE account in India. I think that I can transfer any amount without paying any additional taxes, am I correct?

Also, I understand that I should pay taxes in US on interest earned on NRE account. How much tax am I supposed to pay?

Is transferring money to parents is a better option? Can I directly transfer money in US to my parent's(Indian Citizens, living in India) saving accounts in India. Do I need to pay any tax if money transferred to each parent is below $14,000? Do I need to report IRS about these transactions?

Answer 1

The following are my opinion based upon research/analysis. Since this involves Taxation rules, suggest you consult a Tax attorney for their views.

a. Yes. You can transfer any any amount of dollars to your NRE account without paying any additional taxes.

b. Since you have passed Substantial Presence test, you will be categorized Resident Alien. You need to disclose the interest earned on your NRE account. This amount will be clubbed with your total income in US. You would have to add this interest income in your total income and calculate tax thereon.

C. Transferring money to Parents? Answer is Yes /No. You need to elaborate on this further. Advantage of parking money in NRE account is that you can repatriate money in dollars any time you want. Assuming you need to buy a house or further education , this would be useful. Incase you don't have any of those goals, Yes you can transfer money to your Parent if they are in need of funds.

d. Any transfer above $14000 will attract gift taxes. This $14000 is the overall limit for a Tax payee. Incase you transfer $14000 for each parent, then it comes to $28000. There are chances that IRS may raise a Redflag that you are circumventing the limit by splitting the recipients.

e. Only when you transfer more than $14000, you need to report and pay the gift tax.

Answer 2

AFAIU, you don't need pay any taxes for you amount in NRE account since this amount is already taxed.

I also think, you do not need to pay taxes on the interest earned on NRE account. However, you need to disclose the amount in your Indian Bank(s), if at any point of time, exceed $10K (When converted from INR to $). This is FBAR.

Sending money to non-NRE account would come under Indian Tax scanner. For instance, if your parents use that money to pay EMIs or any huge purchase, then that might cause an issue. Most of the times, these type of purchases go unnoticed. However, the party who is taking money, may ask for source, especially if its a financial institution or Govt bodies. Also, for non-NRE accounts, you need to pay taxes and on interest earned.

Hope this helps!