5 Tax Mistakes Indian H-1B Holders Make Every Year

These five errors show up year after year in H-1B tax returns. Each one is fixable — but the penalties for missing them range from annoying to catastrophic. Here is what to watch for and how to get it right.

Mistake 1: Not Reporting Foreign Accounts (FBAR and FATCA)

What Goes Wrong

Many H-1B filers have NRE, NRO, PPF, EPF, or fixed deposit accounts in India that they opened before moving to the U.S. Once you become a U.S. tax resident — which usually happens after your first full calendar year on H-1B — these accounts trigger two separate reporting obligations that have nothing to do with whether you owe any tax on the accounts:

• FBAR (FinCEN Form 114): Required if the aggregate value of all foreign financial accounts exceeded $10,000 at any point during the year. Filed electronically with FinCEN — entirely separate from your tax return, at bsaefiling.fincen.treas.gov.
• FATCA (Form 8938): Required if foreign financial assets exceed $50,000 at year-end ($75,000 at any point) for single filers living in the U.S., or $100,000 year-end / $150,000 at any point for MFJ filers living in the U.S. Higher thresholds apply if you live abroad ($200,000/$300,000 single; $400,000/$600,000 MFJ). Filed with your Form 1040.

These are separate requirements with different thresholds and different administering agencies. Filing one does not satisfy the other.

What It Costs

FBAR non-willful penalties are up to $10,000 per report per year (per Bittner v. United States, 598 U.S. 85 (2023)). If you did not file for three years, the potential penalty exposure is $30,000 — on top of any taxes owed. FATCA failure-to-file penalties start at $10,000 and can escalate to $50,000 if not corrected after IRS notice. Willful FBAR violations carry penalties up to the greater of $100,000 or 50% of the account balance per year.

How to Fix It

If you have never filed FBAR or Form 8938 but had reportable foreign accounts, the IRS Streamlined Filing Compliance Procedures can bring you into compliance with reduced penalties — provided the non-filing was non-willful. See our FBAR guide and FATCA guide for threshold details and filing instructions.

Mistake 2: Using the Wrong Cost Basis for RSU Sales ($0 Error)

What Goes Wrong

When your RSUs vest, the fair market value (FMV) on the vesting date is included in your W-2 as ordinary income — you have already paid income tax on it. When you later sell those shares, your cost basis should be that same FMV. But many brokers (E*Trade, Fidelity, Schwab, Morgan Stanley) report RSU sales on Form 1099-B with a cost basis of $0 or with the field left blank. If you enter $0 basis on Schedule D, you pay capital gains tax on the full sale proceeds — including the portion you already paid ordinary income tax on at vesting. You end up paying tax twice on the same income.

What It Costs

How to Fix It

Find the FMV per share on each vesting date from your broker's supplemental tax statement (separate from the 1099-B). Use that as your cost basis on Form 8949 and Schedule D. Select "Box B" (basis not reported to IRS) and enter the corrected basis. Our RSU cost basis correction guide walks through this step by step.

Mistake 3: Treating Indian Mutual Funds as Regular Investments (PFIC)

What Goes Wrong

Indian mutual funds — including large-cap equity funds, debt funds, and hybrid funds from AMCs like SBI, HDFC, ICICI Prudential, and Mirae — are classified as Passive Foreign Investment Companies (PFICs) under U.S. tax law (IRC §1297). Many H-1B filers report gains from selling or redeeming these funds on Schedule D as if they were regular stock sales. This approach is technically wrong and skips a required Form 8621 filing.

Without a Mark-to-Market or QEF election, gains and distributions from a PFIC are taxed under the default "excess distribution" regime: gains are spread back over your entire holding period and taxed at the highest ordinary income rate for each prior year, plus IRS interest charges going back to each of those years. This can result in an effective tax rate well above 50%.

What It Costs

A ₹10 lakh (approximately $12,000) gain from redeeming an Indian mutual fund held for 5 years, taxed under the excess distribution regime, could result in $3,000–$5,000 in federal tax plus IRS interest surcharges on amounts notionally attributed to earlier years. Under the Mark-to-Market election (Section 1296), the same gain would typically be taxed at your current ordinary income rate with no interest surcharge.

How to Fix It

File Form 8621 for each Indian mutual fund you hold. The Mark-to-Market election is usually the simplest option — you report the annual change in value as ordinary income each year, even if you have not sold. This eliminates the punitive excess distribution calculation entirely. See our PFIC and Form 8621 guide for the election mechanics and a step-by-step filing walkthrough.

Mistake 4: Missing India-U.S. Tax Treaty Benefits (Form 8833)

What Goes Wrong

The United States and India have an income tax treaty (in force since 1990) that provides reduced withholding rates and certain exemptions. Most H-1B filers ignore the treaty entirely — either because they do not know it exists or because they assume it has nothing to offer once they are a U.S. resident. In reality, the treaty has provisions that can reduce the Indian TDS rate on NRO interest and dividends from the standard 30% to 15%, and it provides guidance on pension income, teacher and student income, and certain government payments.

When you take a treaty position that reduces tax otherwise owed (or changes how income is characterized), you are required to disclose it on Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)). Filing Form 8833 is mandatory for most treaty positions — it is not optional. Failing to file it when required carries a penalty of $1,000 per failure for individuals under IRC §6712.

What It Costs

The cost of missing the treaty works both ways. If you are not claiming treaty benefits you are entitled to, you overpay Indian taxes that could be reduced under the 15% treaty rate on NRO interest. If you are silently relying on a treaty position without filing Form 8833, you face a $1,000 penalty per unreported position. The larger risk is that without Form 8833, the IRS may recharacterize the income on audit, which can produce unexpected tax and penalties.

How to Fix It

Identify any income where you are relying on an India-U.S. treaty benefit — including reduced withholding rates claimed with your Indian bank. File Form 8833 with your tax return to disclose the treaty position. The form is short (one page) but legally significant. See our India-U.S. tax treaty guide for which treaty articles are relevant for H-1B filers and how to complete Form 8833.

Mistake 5: Filing as Nonresident When You Are a Resident (or Vice Versa)

What Goes Wrong

U.S. tax residency for H-1B holders is determined by the Substantial Presence Test (SPT) — a day-count formula based on physical presence in the United States over the current year and two prior years. The formula is: (days in current year) + (1/3 × days in prior year) + (1/6 × days in the year before that). If the result equals or exceeds 183, you are a U.S. resident for tax purposes and must file Form 1040 — reporting worldwide income.

The most common version of this mistake is F-1 students who transitioned to H-1B mid-year and file Form 1040NR when they should file Form 1040. F-1 visa holders are "exempt individuals" excluded from the SPT count for up to 5 years — but once you are on H-1B, you lose the exempt status and your days start counting. Filers who spent January through September on F-1 OPT and October through December on H-1B sometimes incorrectly file as nonresidents for the full year, missing the point where their residency began.

The reverse also happens: someone who was only briefly in the U.S. on H-1B (arrived late in the year) files as a full resident when they should file as a dual-status alien or nonresident — missing deductions available only on 1040NR.

What It Costs

Filing Form 1040NR as a resident alien means you likely excluded foreign income that should have been reported. The IRS can assess tax on that omitted income plus failure-to-report penalties (up to 20% of the understatement under IRC §6662) and interest. Conversely, filing Form 1040 as a nonresident means you may have over-reported income or missed treaty benefits available only to nonresidents — you overpaid tax you can recover only by filing an amended return before the statute of limitations closes (generally three years from the original filing date).

How to Fix It

Run the Substantial Presence Test for your specific year. Count every day you were physically in the U.S. — including travel days, partial days, and work trips. Subtract days that are exempt (F-1 days if you were on F-1 earlier in your career, medical condition days, etc.). If you are unsure about your residency start date in a transition year, see our Substantial Presence Test guide and our Form 1040 vs. 1040NR comparison for a detailed breakdown.

Quick Reference: The 5 Mistakes at a Glance

How Our Platform Handles These

H1B TaxFile is built around the exact mistakes above. Our filing wizard prompts you for all foreign account information, automatically calculates FATCA thresholds, and generates Form 8938. We auto-correct RSU basis from broker supplemental data. We identify Indian mutual funds as PFICs and generate Form 8621. We flag treaty positions that require Form 8833 disclosure. And we run the Substantial Presence Test to confirm your correct filing status before generating the return.

The one thing we cannot do is file FBAR for you — it goes to FinCEN, not the IRS, and must be submitted separately at bsaefiling.fincen.treas.gov. We provide an FBAR reminder with the correct link, the accounts to report, and the deadline after you complete your return.