We recently did a presentation for a company where many of them had managed to secure H1B visas via a lottery system. For a while, the US had capped these visas, but the lottery has been re-opened again. For companies getting ready to send their team members to the US, here are some taxation aspects to know.
It’s important to know what your residential status will be, and how that will affect your taxation.
Residential Status in India:
For the first year, your status will either be NRI or Resident in the year of departure depending on the number of days in India. From the second year, your status will be NRI and only Indian sources will be taxed in India.
Residential Status in USA:
You will be considered a Resident Alien, and you’ll need to fill out forms accordingly (Form 1040). Worldwide income will be taxable in the USA and credits for taxes paid in India will be available.
Residential Status for State:
- Year 1- will be Part year or Full year depending on the date of move
- Year 2- full year resident of the state
- Worldwide Income will be taxable
- Credits unavailable for Indian taxes paid
The US has only recently opened up the lottery for H1B visas, after capping it for a few years. For Indians going to the US to work, and for companies with employees moving to the US for work, some of these aspects that impact taxes are good to know in advance so you can be prepared.
Residential status under FEMA
For non-residents, FEMA is effective from the date you leave India for employment and you are not looking at coming back with certainty.
Why is this important?
- It impacts the type of accounts you can hold
- It impacts the extent of monies you can take out of India
- It affects certain investments you can make in India (Investment houses will need your FEMA residency to be disclosed in the KYC)
Banking and Access to Funds
1. Generally, within 6 months of leaving the country, you should convert your bank and banking to Non-Resident status.
2. What is the impact on ability to repatriate outside India? Once an NRI for FEMA you will be able to take a $1MM out each financial year.
3. In the US, think carefully about where you want to open your bank account. Generally, you do it in the state where your employment is. You will need two forms of ID, Birth certificate or passport, your visa, SSN, and employment letter.
Access to funding sources on H1B: possibilities and limitations
1. Remember, from your accounts in India (a resident account), you cannot withdraw more than $250K per year. From an NRO account, you can draw $1million per year.
2. From your family accounts in India, each of your family members can send you $250k per year to your US account, or they could transfer it to your NRO account in India to that extent. If you do expect to receive funds from family, best to transfer to Resident Account before conversion.
3. For Tax Collected at Source (TCS) on Liberalized Remittance Scheme (LRS) transactions, 5% applies on any forex sent abroad (i.e. LRS from Resident account). 20% is the new TCS rule except when sent out for Medical and Education (this is not application for NRIs). This TCS is similar to TDS (Tax Deducted at Source) in India, and is considered a prepayment towards regular income tax and therefore creditable in India when filing returns.
4. For Tax implication on Gifts paid or received, it is helpful to know that gifts from your Indian parents will now be reportable in the USA. Be sure to ask your advisor when you receive these funds.