For NRIs juggling financial obligations across borders, understanding your US residency status is crucial not just for the IRS but also for the Indian tax department. Whether you’re filing taxes in India, claiming DTAA relief, or managing global income, your Substantial Presence Test (SPT) status can make or break your compliance efforts.
This guide explains how your US tax residency impacts your Indian tax filing, how to avoid double taxation, and what steps to take as a US-based NRI.
Understanding the Substantial Presence Test (SPT)
What is the Substantial Presence Test?
The SPT is used by the Internal Revenue Service (IRS) to determine whether a non-US citizen qualifies as a resident for tax purposes.
Criteria: The 183-Day Rule
You’re considered a US tax resident if you meet both:
- Present in the US for at least 31 days in the current calendar year AN
- Present for 183 days over the current year and the previous two years, calculated as:
- All the days in the current year
- 1/3 of the days in the previous year
- 1/6 of the days two years prior
SPT Calculation Example (for 2025):
Let’s say you were in the US for:
- 120 days in 2025
- 180 days in 2024
- 90 days in 2023
SPT Total = 120 + (180 × 1/3) + (90 × 1/6) = 120 + 60 + 15 = 195 days → You are a US tax resident
Green Card Holders vs. SPT Residents
- Green card holders are automatically US tax residents, regardless of SPT.
- SPT applies to non-immigrant visa holders like H-1B, L-1, etc.
- F, J, M visa holders (students/scholars) get exemptions from SPT for the initial years.
How US Tax Residency Affects Your Indian Tax Filing
Indian Tax Residency Rules
As per the Income Tax Act of India, you are a resident in India if:
- You stay in India ≥ 182 days in a financial year OR
- You stay ≥ 60 days in the year AND ≥ 365 days in the last 4 years
If you don’t meet these, you’re a Non-Resident Indian (NRI) for Indian tax purposes.
Why This Matters
- NRIs are only taxed on income earned or received in India
- Indian residents are taxed on global income
- Dual residency (both US and India) can lead to double taxation if not handled correctly
The Consequences of Dual Residency
How Dual Residency Can Lead to Double Taxation
If you’re classified as a tax resident in both the US (via SPT) and India (via the 182-day rule), your worldwide income may be taxed in both countries.
How to Mitigate Double Taxation
Thanks to the India–US Double Taxation Avoidance Agreement (DTAA), you can claim tax relief:
Key DTAA Provisions
- Credit Method: You pay tax in the US and claim credit in India
- Tie-Breaker Rule: Determines where you’re primarily a resident
- Exempt Income: Some incomes may be exempted in one country if taxed in the other
Steps to Ensure Proper Tax Filing for NRIs with US Residency
Filing Taxes in the US
As a US tax resident (green card or SPT):
- File Form 1040 for income tax
- Declare worldwide income
- May use Form 2555 (Foreign Earned Income Exclusion) or Form 1116 (Foreign Tax Credit)
Filing Taxes in India
As an NRI:
- File ITR-2 or ITR-3 (based on income sources)
- Claim foreign tax credit using Form 67 (must be filed before the due date of return)
- Report foreign assets in Schedule FA (only if an Indian resident)
How to Claim Foreign Tax Credit in India
- File your US taxes and get proof of tax paid (IRS transcript/Form 1040)
- Fill Form 67 with tax paid, foreign country, and nature of income
- Upload Form 67 on the Income Tax India e-filing portal
- File Indian return using ITR with foreign income and claimed credits
When to Seek Professional Help
- If you qualify as a resident in both countries
- If your income includes stocks, property, or capital gains
- To properly apply the DTAA tie-breaker and avoid penalties for misfiling
Common Mistakes to Avoid
1. Misunderstanding Residency Status
- Misreporting tax residency in either country can lead to underpayment penalties
- Not knowing you meet the SPT may cause you to under-report in the US
2. Not Claiming DTAA Benefits
- Many NRIs overpay taxes by skipping Form 67 or Form 1116
- Claiming the foreign tax credit is essential to avoid double taxation
3. Incorrect SPT Calculations
- Miscounting days in prior years is a common error
- Use a calendar-based tracker or tax software to calculate precisely
Conclusion
Understanding and correctly applying the Substantial Presence Test is vital if you live in the US and have ties to India. Your US residency status affects how you file taxes in both countries and determines whether you can legally reduce or eliminate double taxation.
Use the SPT formula to determine if you’re a US tax resident
NRIs must comply with Indian tax laws if earning from Indian sources
Claim DTAA relief via Form 67 to avoid paying tax twice on the same income
NRIs should track their residency status annually, file the right forms in both countries, and seek expert tax advice when dealing with dual income and tax residency. It can save thousands in taxes and ensure peace of mind.
FAQs
Q1. What happens if I qualify as a resident in both the US and India?
You may be subject to double taxation, but you can apply tie-breaker rules under DTAA to determine your primary residency and claim tax relief.
Q2. Can I avoid double taxation if I meet the Substantial Presence Test?
Yes, if you file Form 67 in India and/or Form 1116 in the US, you can claim foreign tax credits to avoid being taxed twice.
Q3. How do I apply for tax relief under the India-US DTAA?
- In India: File Form 67
- In the US: File Form 1116 for foreign tax credit
Make sure you have documentary proof of taxes paid.
Q4. What forms should I file if I am an NRI with US tax residency?
- In the US: Form 1040, Form 1116, or 2555
- In India: ITR-2/3 + Form 67 (if claiming credit for US tax)
Q5. What is the penalty for incorrect tax filing as an NRI?
Penalties in both countries can include interest, late fees, or even audit triggers, especially if foreign assets or dual incomes are not disclosed correctly.
Q6. Can I avoid double taxation on money transferred to India?
Yes, the India-US DTAA provides a way to avoid double taxation. By filing the correct forms, like Form 67 in India, you can claim tax credits for taxes paid in the US. This ensures that the same income isn’t taxed in both countries, allowing you to legally reduce your tax burden.
Q6.How does my US tax residency affect sending money to India?
As a US tax resident, you need to ensure that your global income is reported correctly, including any money transferred to India. The IRS requires you to declare worldwide income, so while sending money to India may not directly impact your taxes, it’s important to stay compliant with both US and Indian tax laws to avoid penalties.
