U.S. EXPAT TAX GUIDE – INDIA

How can US expats in India use the Foreign Earned Income Exclusion and Foreign Tax Credits to lower their taxes?

For US citizens living in India, a major concern is avoiding double taxation—paying taxes in both India and the United States.

Fortunately, there are strategies that can help minimize this burden, particularly through the use of the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

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What is the Foreign Earned Income Exclusion (FEIE) and how does it help?

The Foreign Earned Income Exclusion (FEIE) allows US expats to exclude a substantial amount of foreign-earned income from US taxation. For the 2025 tax year, this amount is up to US$130,000.

This exclusion is applicable only to earned income, such as wages and self-employment earnings, and does not cover other forms of income like dividends, rental income, or interest.

To qualify for the FEIE, you must meet one of the following two criteria:

Physical Presence Test: You need to be physically present in a foreign country, like India, for at least 330 full days in any consecutive 12-month period.
Bona Fide Residence Test: You must be a bona fide resident of a foreign country, such as India, for a full tax year. This option is ideal for those who have relocated to India on a long-term basis.

How does the Foreign Tax Credit (FTC) work for US expats in India?

The Foreign Tax Credit (FTC) provides a way to reduce US tax liability for taxes paid to the Indian government. This is particularly useful if your income exceeds the FEIE threshold or if you have types of income that cannot be excluded, such as investment earnings or rental income.

The FTC works by providing a dollar-for-dollar reduction in your US taxes, up to the amount of tax liability attributable to your foreign income.

For instance, if you paid Indian taxes at a rate of 30%, and your corresponding US tax rate is 35%, the FTC can significantly reduce the taxes you owe to the US government on that foreign income.

Is it possible to use both the FEIE and the FTC together?

Yes, US expats can use both the FEIE and the FTC, but not for the same income. The FEIE can be used to exclude up to US$130,000 of earned income, while the FTC can be applied to offset US taxes on any remaining income or income types not eligible for the FEIE.

For example, let’s say you earn US$150,000 in 2025. You can use the FEIE to exclude US$130,000 of that income, and then apply the FTC to the remaining US$20,000.

It’s a common misconception that you must choose between the FEIE and the FTC, when in reality, you can use both on a single tax return—just not on the same income.

Another misunderstanding is that using the FEIE disqualifies you from other deductions or credits. This is false—you can still claim the standard deduction or itemized deductions, and other credits such as the Child Tax Credit if you meet the qualifications.

What role does the US-India tax treaty play for US expats?

The US-India tax treaty is in place to prevent double taxation and to establish which country has the primary right to tax different types of income. This treaty includes provisions related to pensions, dividends, royalties, and more.

While the treaty can help alleviate double taxation, it does not exempt US citizens and Green Card holders from filing a tax return.

It’s important to report your worldwide income, and the treaty can determine which country has the primary taxing rights for certain income streams. To claim treaty benefits, you may need to file Form 8833 with the IRS.

What options are available if US expats missed filing previous tax returns or FBARs?

If you have missed previous filings for tax returns, FBARs, or FATCA forms, it’s essential to address these lapses promptly. The IRS provides the Streamlined Filing Compliance Procedures for taxpayers who were unaware of their filing obligations.

This program allows expats to catch up on missed filings without facing some of the more severe penalties, provided they can certify that their non-compliance was not willful.

Taking advantage of the Streamlined Procedures can help you become compliant and avoid further complications, such as fines or criminal charges.

Why should US expats in India consider consulting a tax professional?

When it comes to understanding how different tax credits, exclusions, and treaty provisions interact, a tax professional with expertise in US expat taxation and Indian tax laws can help you:

Maximize Tax Benefits: Ensure you are using the FEIE, FTC, Foreign Housing Exclusion, and other deductions or credits effectively.
Avoid Errors and Penalties: Accurately file all required forms, including FBAR and FATCA reports, to avoid costly penalties.
Create a Tax Plan: Develop a personalized tax strategy that takes into account your income, investments, and financial goals, thereby reducing your overall tax liability.

Consulting a professional is particularly valuable if you have a complex financial situation, such as owning foreign investments, managing rental properties, or dealing with self-employment income.

Their guidance can save you money and ensure you stay fully compliant with both US and Indian tax regulations.

Why partner with a specialist Expat accountant?

Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.

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