Moment guide · FY 2026-27

I have US and India tax exposure

What are the key US-India tax traps for a US citizen or green card holder?

Sec 90Sec Saving ClauseSec PFICSec FBARVerified 2026-08-11

The India-US DTAA's saving clause allows the US to tax its citizens and green card holders on worldwide income, so treaty planning never fully removes US obligations. The treaty has no capital gains exemption for Indian assets, Indian mutual funds are PFICs for US residents with punitive consequences, and Roth IRA distributions are not protected by the treaty. Foreign accounts above $10,000 need FBAR filing.

Your legitimate options

Every route the statute actually gives you — with its condition, cap and deadline.

Route	Condition	Cap / deadline
Saving clause	The India-US DTAA saving clause lets the US tax its citizens and green card holders on worldwide income regardless of the treaty	Treaty benefits cannot override US citizenship taxation
No capital gains exemption	The India-US DTAA has no capital gains article exemption for Indian assets — gains on Indian property or shares are taxable in India	Both countries may tax, with FTC relief
PFIC and FBAR for US residents	Indian mutual funds are PFICs for a US resident — punitive tax and reporting; foreign accounts above $10,000 require FBAR	Roth IRA is not protected by the treaty

The #1 trap

Thinking the DTAA makes everything simple — the saving clause lets the US tax its citizens and green card holders on worldwide income anyway, so a US citizen in India still files US returns. Also, Indian mutual funds held by a US resident trigger PFIC reporting with punitive taxation, and a Roth IRA is not recognised by the treaty, so its distributions are taxable in India.

The decision path

Follow it top to bottom — the first condition that matches is your answer.

IF you are a US citizen or green card holder → the saving clause lets the US tax worldwide income despite the treaty.
IF you sell Indian property or shares → the DTAA has no capital gains exemption; India taxes the gain with FTC relief in the US.
IF you are a US resident holding Indian mutual funds → they are PFICs with separate punitive reporting and taxation.
IF you hold a Roth IRA → the treaty does not protect it; distributions are taxable in India when you are a resident.
IF your foreign accounts exceed $10,000 in aggregate → file FBAR with FinCEN. [VERDICT: citizenship-based US tax overrides the treaty — plan both filings.]

Worked example

Aisha, US citizen living in Bengaluru

Aisha is a US citizen who moved to Bengaluru in 2023. Under the saving clause of the India-US DTAA, the United States retains the right to tax its citizens on worldwide income regardless of the treaty, so Aisha files a US return every year in addition to her Indian return, and the foreign tax credit on Form 1116 in the US prevents double taxation of the same income. She sells a flat in Mumbai bought in 2015 for ₹30,00,000, selling it for ₹80,00,000 in 2026. The India-US DTAA has no capital gains article that exempts Indian real estate from Indian tax, so India taxes the ₹50,00,000 long-term gain at 12.5% without indexation, and the US taxes the same gain with a credit for the Indian tax. Aisha holds ₹20,00,000 of Indian equity mutual funds, and as a US resident those funds are Passive Foreign Investment Companies (PFICs): she must file Form 8621 annually and choose the QEF or mark-to-market election, because the default PFIC rules impose punitive interest and penalty taxes on distributions. Her colleague's Roth IRA is not recognised as tax-deferred by the India-US treaty, so when the colleague, now resident in India, withdraws from the Roth, the distribution is taxable in India even though it is tax-free in the US. Aisha's Indian bank accounts, taken together with her US accounts above $10,000, require an FBAR filing with FinCEN each year. Aisha keeps both the US and Indian tax returns and the PFIC elections together. A quick call with us dials in the final figure. Aisha also checks the foreign tax credit mechanics on both sides: the Indian tax on her US-source income is creditable in the US on Form 1116, and the US tax on her Indian income is creditable in India via Form 67, filed before the due date. The PFIC election for the Indian mutual funds must be made in the first year she is a US resident, because a late election can be made only with IRS consent. If she holds Indian shares directly, they are not PFICs, but the dividends are reportable in both countries. The FBAR threshold of $10,000 is tested on the aggregate of all foreign accounts, and the filing is to FinCEN, separate from the FATCA Form 8938. A quick call with us dials in the final figure.

Questions people actually ask

Does the DTAA stop the US from taxing its citizens in India?

No — the saving clause allows the US to tax its citizens and green card holders on worldwide income regardless of the treaty, with foreign tax credit preventing double taxation.

Are Indian mutual funds problematic for US residents?

Yes — they are PFICs for US tax purposes, requiring Form 8621 and elections, with punitive default taxation.

Is a Roth IRA protected by the India-US treaty?

No — the treaty does not recognise the Roth's tax-free character, so distributions can be taxable in India when you are a resident.

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Sections: 90, Saving Clause, PFIC, FBAR · Last verified 2026-08-11 · Reviewed by Harun Raaj & Associates, Chartered Accountants. Every figure cites the Income-tax Act, 1961 (with ITA 2025 mapping via our section index).