Indian professionals who move back from the US after several years often expect to file one last US return and then be done. In most cases, it does not work that way.
Depending on when you returned and what your status was in the US, both countries can consider you a tax resident for the same year.
This is called dual tax residency. It does not automatically mean you pay full tax in both countries, but it does create filing obligations on both sides, and how you handle them determines whether you pay more than you should.
This guide explains how dual residency happens, how Article 4 of the India-US DTAA resolves it, and what you need to do on each side.
Table of contents
- How dual residency happens
- Which country wins? The Article 4 tie-breaker
- What you owe the US
- What you owe India: the RNOR case
- What you owe India: the ROR case
- Will you actually pay tax twice?
- Two things most people get wrong
- How Paasa helps
How dual residency happens
India and the US each have their own rules for deciding whether you are a tax resident. The problem is that both can fire for the same year.
India's test
India counts you as a tax resident if you are physically present in India for 182 days or more in a financial year (April 1 to March 31). If you returned in June or July, you will typically cross 182 days before March 31, making you an Indian tax resident for that year.
The US Substantial Presence Test
The US runs its own test on a calendar year (January 1 to December 31) using a weighted three-year formula:
- All days you were present in the US in the current year
- Plus one-third of your days in the preceding year
- Plus one-sixth of your days in the year before that
If the total is 183 or more, the US treats you as a tax resident for the current calendar year, even if you left mid-year.
Green Card holders are automatically US tax residents for the full calendar year until the card is formally surrendered, regardless of how many days they were present.
Where the overlap happens
India measures April to March. The US measures January to December. Both tests can fire simultaneously. If you left the US in June, the US counts you as a resident from January through your departure date, while India counts you as a resident from your return date through March 31. Both domestic laws apply at the same time, and without a deliberate step to resolve this, both countries have a legal basis to tax your worldwide income.
Example
Suppose you are a consultant working on projects in both India and the US. Your schedule for the last few years looks like this:
- 2022: 120 days in the US
- 2023: 150 days in the US
- 2024: January 1 to June 1 in the US (152 days), then returned to India for the rest of the year
This specific travel pattern triggers residency rules in both countries because they use different calendars to measure a "year."
1. The US view (Calendar Year)
The US IRS calculates taxes based on the Calendar Year (January 1 to December 31). They apply the Substantial Presence Test, which has two conditions:
- Condition A: You must be present in the US for at least 31 days during the current year. You stayed 152 days in 2024. (Condition met)
- Condition B: You must meet the 183-day weighted count over the last 3 years.
| Year | Days in US | Weighting | Counted days |
|---|---|---|---|
| 2024 | 152 | 100% | 152 |
| 2023 | 150 | 1/3 | 50 |
| 2022 | 120 | 1/6 | 20 |
| Total | 222 |
Since you meet both the 183-day weighted count and the 31-day minimum, you are considered a US tax resident for 2024.
2. The India view (Financial Year)
India calculates taxes based on the Financial Year (April 1, 2024 to March 31, 2025). You were in the US for April and May 2024, returned to India on June 2, 2024, and stayed through March 31, 2025, a total of approximately 300 days. Since you meet the Indian tax residency requirement of staying for 182 days or more, you are considered an Indian tax resident for FY 2024-25.
The result: overlapping tax demands
Because of the calendar mismatch, you are legally a tax resident of both countries at the same time. Income earned during the overlapping period of June 2, 2024 to December 31, 2024 is at risk of being taxed twice: the US claims it belongs to their 2024 tax year, and India claims the same income belongs to FY 2024-25. This is exactly what Article 4(2) of the India-US DTAA is designed to resolve.
How is tax residency decided?
The India-US DTAA does not eliminate dual residency under each country's domestic law. What it does is determine which country gets to treat you as its resident for treaty purposes, which then controls how taxing rights over your income are divided.
Article 4(2) of the treaty applies four tests in strict sequence. The process stops as soon as one test gives a clear answer:
Step 1: Permanent home The treaty looks at where you have a permanent home available to you. Ownership is not required. A long-term rental, a family home you can return to, or your parents' home all count. If your permanent home is in India and not in the US, India wins here.
Step 2: Centre of vital interests If you have a permanent home in both countries, the test shifts to where your personal and economic ties are stronger. The treaty considers your family location, employment, business interests, and banking. For most returning NRIs whose family has relocated to India, India wins at this step.
Step 3: Habitual abode If the centre of vital interests test is inconclusive, the treaty looks at where you spend more of your time habitually.
Step 4: Nationality If all three tests above are inconclusive, your country of citizenship decides. An Indian citizen holding a US Green Card (but not US citizenship) resolves here in India's favour.
What the result means in practice
Being a treaty resident of India means India retains residence-country taxing rights over your worldwide income. The US, for treaty purposes, treats you as a non-resident from your departure date. It can only tax US-source income from that point forward.
Note: The tie-breaker applies for treaty purposes only. Both countries may still require you to file a return under their domestic laws. Being a treaty resident of India does not eliminate your US filing obligation. It limits what the US can tax.
What you owe the US
If you left the US mid-year, the IRS treats you as a dual-status taxpayer in the year of departure: a resident alien for the part of the year you were present, and a non-resident alien (NRA) for the rest.
What a dual-status return involves
- Form 1040 covers January 1 to your departure date, reporting your worldwide income for that resident period
- Form 1040-NR covers the remainder of the calendar year, reporting only US-source income earned after departure (dividends, brokerage income, etc.)
Two restrictions apply to dual-status returns that are worth knowing upfront:
- You cannot claim the standard deduction
- You cannot file as Married Filing Jointly
Both of these can meaningfully increase your US tax bill, which is one reason timing your return date carefully matters.
The closer connection option (Form 8840)
If you pass the Substantial Presence Test mathematically but have a clear closer connection to India (permanent home, family, economic ties all relocated), you can file Form 8840 to claim an exception from US resident status under the SPT. This is a simpler route than invoking the DTAA and is available to non-Green Card holders. It must be filed by the US tax return due date.
Green Card holders: an important note
Surrendering a Green Card involves Form I-407 through US Customs or a US Consulate. If you have held the Green Card for eight or more years, surrendering it may trigger exit tax rules under Section 877A of the Internal Revenue Code. This is one of the most consequential tax decisions in the return process. Consult a US CPA before surrendering.
Note: Dual-status returns, exit tax, and treaty elections involve significant complexity. Consult a US-qualified CPA or tax advisor for your specific situation.
What you owe India: the RNOR case
Most returning NRIs qualify as Resident but Not Ordinarily Resident (RNOR) in the year they return. You qualify as RNOR if you meet either of these conditions:
- You were a Non-Resident Indian in at least 9 of the 10 preceding financial years, or
- You spent 729 days or fewer in India across the preceding 7 financial years
Anyone who lived in the US for several years before returning will almost certainly qualify.
What India taxes you on as RNOR
As RNOR, India taxes only your India-source income. Your foreign income, including your US salary earned before you returned, is not taxable in India.
| Income type | Taxable in India as RNOR? |
|---|---|
| India salary from your return date | Yes |
| US salary earned before returning | No |
| US dividends and capital gains | No (if received in a foreign account) |
| Interest on NRE / FCNR accounts | No |
| Interest on Indian savings or FD accounts | Yes |
What you need to file
- File ITR-2 and declare RNOR status explicitly
- Report your India-source income from your return date
- Schedule FA is not required as RNOR
- Schedule FSI and Form 67 are only needed if you have foreign income that is specifically taxable in India, for example income received directly into an Indian bank account
Note: Once you become ROR (typically after 2-3 years), India taxes your worldwide income and Schedule FA, FSI, and Form 67 all become mandatory. The RNOR window is the right time to restructure your foreign portfolio before that happens.
What you owe India: the ROR case
Some returning NRIs do not qualify for RNOR status. This typically applies to those who were abroad for fewer than nine years, or who had significant physical presence in India during their time abroad.
If you are ROR in the return year, India taxes your worldwide income from April 1 of that financial year. This includes:
- All India-source income
- Your pre-return US salary
- US dividends and capital gains
- Any other foreign income
How the DTAA credit works as ROR
You do not pay full tax twice. India taxes your US salary at your applicable slab rate. The US also taxed the same salary during your resident period. You then claim credit for the US tax paid via Form 67 in your Indian ITR.
The credit is limited to the lower of:
- (A) US tax actually paid on that income
- (B) Indian tax payable on that same income
If (A) is higher than (B), the excess is permanently lost. It cannot be carried forward.
| Income type | Taxable in India as ROR? | Relief available |
|---|---|---|
| US salary earned before returning | Yes | FTC via Form 67 |
| US dividends | Yes | FTC via Form 67 for withholding tax |
| Capital gains from US stocks | Yes | FTC via Form 67 if US tax was levied |
| India salary | Yes | No foreign credit needed |
What you need to file as ROR
- File ITR-2 (or ITR-3 if you have business income)
- Report worldwide income
- Fill Schedule FA for all foreign assets held during the calendar year
- Fill Schedule FSI for all foreign income
- File Form 67 before your ITR for any US tax paid on income also taxable in India
Will you actually pay tax twice?
In most cases, no. Here is how it plays out depending on your status:
If you are RNOR: There is no double tax problem. India simply does not tax your foreign income. The US taxes your pre-return salary as a resident for the period you were present. You pay US tax on US income, Indian tax on India income, and there is no overlap.
If you are ROR: Your pre-return US salary is taxable in both countries, but the DTAA credit mechanism ensures you pay the higher of the two rates, not both separately. In most cases, US federal rates and Indian slab rates are broadly comparable, so the net additional Indian tax after crediting the US tax paid is modest or zero.
The scenario where you genuinely lose money is when your US tax rate was higher than your Indian rate. The excess US tax in that situation is permanently lost and cannot be carried forward. This is why some returning NRIs with high US incomes plan their return date carefully to minimise the overlap period.
Two things most people get wrong
Assuming US tax obligations end on the day you leave
Your US tax residency does not end when you board the flight. If you pass the SPT for the calendar year, you are a US resident for that full year under domestic US law, unless you file Form 8840 (closer connection exception) or file a dual-status return that correctly terminates residency at departure. Simply not filing a US return does not make the obligation disappear.
Not invoking the DTAA tie-breaker when both tests apply
Some returning NRIs file as full-year US residents because they passed the SPT, and separately file as Indian residents. This is correct from a domestic law standpoint but can result in overpaying the US. Without invoking the tie-breaker or filing a dual-status return correctly, you may end up paying US tax as a resident for the post-departure period when you should only be paying on US-source income as a non-resident alien.
Note: Your US return and your Indian ITR need to take consistent positions on the tie-breaker outcome. Inconsistency between the two creates audit risk in both countries.
How Paasa helps
Paasa is the platform built for global Indian investors, returning NRIs, and family offices managing cross-border portfolios.
For returning NRIs navigating dual residency, Paasa provides:
- Portfolio management through the transition: Hold your US stocks, UCITS ETFs, and global assets on a single platform that remains compliant as your residency status changes
- Tax document preparation: Capital gains reports, dividend statements, and Schedule FA reports using correct SBI TTBR rates, ready to hand to your CA
- RNOR window planning: Guidance on restructuring your portfolio and resetting your cost basis before RNOR status expires
For the US-side filing (dual-status returns, Form 8840, and Green Card exit tax), Paasa works alongside US-qualified tax advisors and can connect you with professionals experienced in India-US cross-border tax.
Reach out to the Paasa team if you have questions about your residency transition or want to review how your portfolio is structured going into the return year.
Disclaimer
This article is intended solely for information and does not constitute investment, tax, or legal advice. The material is based on public sources and our interpretation of prevailing regulations, which are subject to change. Global investments carry certain risks, including currency risk, political risk, and market volatility. Past performance does not predict future outcomes. Please seek advice from qualified financial, tax, and legal professionals before acting.
