Good morning,
We are originally from India and now settled here. We have fixed deposits or cumulative deposits in Indian banks and received interest in 2020 in the local currency (rupees). The banks automatically deduct taxes for the interest paid.
The Indian Income tax levies tax on individual taxpayers based on a slab system. Slab system means different tax rates are prescribed for different ranges of income. It means that the tax rates keep increasing with an increase in the income of the taxpayer.
Based on the slab system, there is no tax on income up to $3,500/year irrespective of the source. Our interest income is less than $3,500. Our CPA files taxes in India. So, we receive a full tax refund.
There is Double Tax Avoidance Agreement (DTAA) between India and the USA. My questions are as follows:
- If we are not paying any taxes in India, do we need to report interest received in India on our 2020 US federal tax return?
- The other option is, not to file taxes in India but file ‘Form 1116” and receive foreign tax credit with federal taxes. But the issue is, the “State of Ohio” does not allow foreign tax credit.
- How do we know which one is the best option?
I have been using TurboTax Premier and this is the first year that we are having this issue. But we will face the same issue (capital gains; double taxation) in the coming years when we sell real estate in India. Please provide your comments and suggestions. Thanks, Dabu.
