The Foreign Tax Credit (FTC) lets you offset US tax dollar-for-dollar with taxes you've already paid to a foreign government on the same income. For H1B holders with Indian income (FD interest, rental income, Indian salary), this prevents double taxation.
What is the Foreign Tax Credit?
The Foreign Tax Credit (FTC) lets you offset US tax dollar-for-dollar with taxes you've already paid to a foreign government on the same income. For H1B holders with Indian income (FD interest, rental income, Indian salary), this prevents double taxation.
Filed on: IRS Form 1116
What Indian income qualifies?
| Income Type | Qualifies for FTC? | Indian tax rate |
|---|---|---|
| Fixed Deposit (FD) interest | ✅ Yes | 30% TDS |
| Savings account interest (>₹10K) | ✅ Yes | 30% TDS |
| Rental income | ✅ Yes | 30% TDS |
| Capital gains on Indian stocks | ✅ Yes | 10-15% |
| Indian salary (if you still earn Indian income) | ✅ Yes | Slab rate |
How Form 1116 works
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- Calculate the foreign income you received (convert to USD at average annual exchange rate)
- Identify the taxes paid in India (TDS deducted at source counts)
- Form 1116 computes: FTC = min(Indian taxes paid, US tax on that same income)
- This credit reduces your US tax liability directly
The DTAA advantage
India-US have a Double Tax Avoidance Agreement (DTAA). Under DTAA, certain types of income (like pensions, dividends) are only taxable in one country. Form 1116 uses the "resourcing" rules under DTAA to maximize your credit.
Common mistakes on Form 1116
- Using the wrong exchange rate (must use Treasury rates, not Google rates)
- Forgetting to include TDS certificates (Form 26AS from India) as documentation
- Not splitting into separate "baskets" — passive income (interest) and general income (salary) must be calculated separately
Documents you need
- India Form 26AS (shows all TDS deducted)
- Bank statements from Indian accounts
- Treasury exchange rates for the tax year (treasury.gov/resource-center/data-chart-center/interest-rates)
Watch the H1B tax mistakes video →
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