The year you leave the US is the most tax-complex of your working life. For that single calendar year, you owe filings to two governments, under two sets of rules, with two different deadlines. Miss a step and you face penalties in both countries. This guide walks H1B holders through exactly what you need to do in your exit year, on both sides of the border.
Before you finalize your departure date, use the NRI return calculator to estimate your tax position across the US and India. The timing of your departure can change your tax bill significantly.
Step 1: Pin down your US residency termination date
Your US tax residency does not end automatically when your H1B visa expires or when you board a flight to India. Under IRS rules, your residency terminates on the last day of the calendar year unless you can establish a "closer connection" to India starting from your actual departure date.
To terminate US residency on your departure date, you need to satisfy two conditions. First, you must have a closer connection to India than to the US from the date you leave. Second, you must not be a US resident in the following calendar year under either the Green Card test or the Substantial Presence Test.
The IRS evaluates closer connection based on where your permanent home is, where your family lives, where your bank accounts are held, and where you filed local tax returns.
This date is what splits your year. Everything before it is treated as a US resident alien (worldwide income taxable in the US). Everything after is treated as a non-resident alien (only US-source income taxable in the US).
Step 2: File a dual-status US tax return
What is a dual-status return?
When you leave the US mid-year, your final US tax return is a "dual-status return." You file Form 1040 as the main return for the period you were a resident alien, and attach Form 1040-NR as a statement for the non-resident period. Write "Dual-Status Return" at the top of Form 1040 and "Dual-Status Statement" at the top of Form 1040-NR.
One critical rule: you cannot claim the standard deduction in a dual-status year. Every expense you want to deduct must be itemized. Many H1B holders miss this and end up with an IRS adjustment.
For a complete walkthrough of this form, see the InvestMates guide on filing Form 1040-NR after returning to India.
What income goes where
During the resident period (January 1 through your residency termination date), you report all worldwide income. After your termination date, you report only US-source income, such as interest from a US bank account or dividends from a US brokerage.
Your employer issues a W-2 for the full calendar year, but you include only the wages earned through your termination date in the resident portion of Form 1040.
The full rules for dual-status filers are in IRS Publication 519, the official US tax guide for aliens.
Step 3: File FBAR and check your FATCA obligation
FBAR (FinCEN Form 114) is required if the total value of your foreign financial accounts exceeded $10,000 at any point during the calendar year. This includes your NRE account, NRO account, EPF balance, and any other Indian bank or brokerage accounts you hold.
FBAR is due April 15, with an automatic extension to October 15. You file it directly through the FinCEN BSA e-filing portal, not with the IRS.
FATCA (Form 8938, filed with your tax return) is a separate requirement. If your foreign financial assets exceeded $50,000 on the last day of the year, or $75,000 at any point during the year (for single filers), you must file Form 8938 along with your 1040.
The penalty for not filing FBAR when required is up to $10,000 per year for non-willful violations. The exit year is the year most people forget because they are busy with the move. That is an expensive oversight.
For the full list of accounts that trigger FBAR, accounts that are excluded, and how to file correctly, read the complete FBAR guide for NRIs.
Step 4: Decide what to do with your 401(k)
Your 401(k) is one of the biggest financial decisions you face when leaving the US. You have three options, each with different tax consequences in both countries.
Most H1B holders with a balance under $100,000 are better off keeping the account or rolling it to an IRA rather than taking the 10% early withdrawal penalty. Under DTAA Article 20, distributions from a 401(k) are taxed only in the US, not in India, as long as you claim the relief correctly in your India return.
read more about - 401(k) vs IRA vs Early Withdrawal: Best Exit Strategy for NRIs Returning to India
Step 5: Handle your Indian mutual funds before you leave
If you hold Indian mutual funds, you need a plan before or during your departure year. Under US tax law, every Indian mutual fund is classified as a Passive Foreign Investment Company (PFIC). This classification has serious tax consequences.
Under the default PFIC regime, gains are taxed at the highest marginal income tax rate, which is 37% for tax year 2025, plus interest charges going back to the year each gain was earned. This can push your effective tax rate well past 40%.
You also need to file Form 8621 for every single fund you hold, even if you made no transactions that year. If you fail to file Form 8621, your entire US tax return remains open for IRS audit indefinitely, with no statute of limitations.
Your main options are:
- Sell before your residency termination date. Gains realized during your resident period are taxed at regular capital gains rates, which is almost always better than the excess distribution regime.
- Make a QEF or MTM election on Form 8621. These elections change how PFIC gains are calculated and taxed going forward.
Take Rahul, for example. He held three Indian mutual funds worth approximately Rs 18 lakh. He sold all three in August before his September departure. The gains were recognized during his resident period and taxed at the long-term capital gains rate. His effective tax rate on the gains was around 15%, compared to 37% plus interest under the default PFIC rules.
Step 6: Know your India residency status after you return
Will you be a resident or RNOR?
The year you return to India, your tax status depends on how many days you have physically been in India during that financial year and the preceding years.
NRI: If you return late in the financial year and spend fewer than 182 days in India in that FY, you remain a non-resident for that year. Only India-source income is taxable.
RNOR (Resident but Not Ordinarily Resident): If you qualify, RNOR status is available for 2 to 3 years after you return. Under RNOR, only your India-sourced income is taxable. Income earned abroad, including your US salary from the period before departure, stays outside India's tax net.
To qualify for RNOR, you must have been an NRI for at least 9 of the 10 financial years before your return.
Resident: Once your RNOR window closes, all worldwide income becomes taxable in India.
India tax slabs under the new regime for FY 2025-26
Under the new tax regime introduced in the Union Budget 2025, income up to Rs 12 lakh is effectively nil after the rebate under Section 87A. RNOR individuals can claim this rebate; pure NRIs cannot. The basic exemption limit under the new regime is Rs 4 lakh.
This matters for your first year back. If your India-side income is modest, your India tax bill may be zero or very small even without RNOR status.
Step 7: Claim DTAA relief to avoid paying tax twice
The India-US Double Taxation Avoidance Agreement is your main tool for preventing the same income from being taxed in both countries. Relief is available in two directions.
In the US: File Form 1116 (Foreign Tax Credit) with your US tax return to claim a credit for taxes you already paid in India.
In India: File Form 67 before submitting your ITR to claim credit for taxes paid in the US. This step is easy to miss and the consequences are serious: if you do not file Form 67 before your ITR, you lose the credit for that year entirely.
Consider Priya's situation. She earned Rs 4 lakh in NRO account interest in her return year. The bank deducted 30% TDS, which is Rs 1.2 lakh. She declared this income in her US return as foreign-source income and filed Form 1116 to claim the Rs 1.2 lakh as a foreign tax credit. She paid tax only once, not twice, because she filed both Form 67 and Form 1116 in the right sequence.
DTAA relief does not happen automatically. You must file the right forms in both countries and in the correct order.
Step 8: Convert your NRE and NRO accounts
Once your India residency status changes to RNOR or Resident, the tax treatment of your accounts changes too.
NRE account interest is fully tax-exempt in India as long as you are an NRI or RNOR. The moment you become a full Resident, that exemption ends and the interest becomes taxable at your applicable slab rate.
NRO account interest is always taxable in India at a TDS rate of 30%, regardless of your residency status.
After your status changes to Resident, convert your NRE account to a Resident Foreign Currency (RFC) account. RFC accounts let you hold foreign currency earned abroad without converting to rupees immediately. For RNOR individuals, interest on RFC deposits remains tax-free. There is no hard legal deadline for this conversion, but your bank may restrict transactions on your NRE account once they learn of your residency change, so act early.
Common mistakes H1B holders make in their exit year
Forgetting FBAR for the departure year. The move creates enough paperwork that the FBAR gets lost. Your FBAR obligation for the exit year remains, regardless of whether you are leaving the US permanently.
Claiming the standard deduction on a dual-status return. Dual-status filers cannot take the standard deduction. This is one of the most common errors on exit-year returns and triggers IRS corrections.
Holding Indian mutual funds without a plan. Many H1B holders discover PFIC rules only after they have returned to India. Retroactive PFIC compliance is expensive and complicated. Act before your residency termination date.
Assuming RNOR applies automatically. RNOR has a specific eligibility test: you must have been an NRI for 9 of the last 10 financial years. If you spent time in India between H1B stints, you may not qualify.
Missing Form 67 in India. DTAA credits in India require Form 67 to be filed before your ITR submission. Many returning NRIs skip this step, then find they cannot claim the credit retroactively.
Conclusion
Your exit year as an H1B holder requires parallel action on both sides of the border. File your dual-status US return correctly, report FBAR for all foreign accounts, address your Indian mutual funds before you leave, plan your 401(k) decision, understand your RNOR window in India, and use Form 67 and Form 1116 to claim DTAA relief. Use the NRI return to India calculator to model your tax position before you book the flight. The earlier you plan, the more options you have.
Cross-border tax has too many moving parts to handle alone, and one missed filing can cost far more than an advisor's fee. Before you make the move, it is worth speaking wit h an NRI tax advisor who has handled this exact situation for hundreds of H1B holders.
Frequently asked questions
Do H1B visa holders face an exit tax when leaving the US?
No. The US exit tax under IRC Section 877A applies only to US citizens who renounce their citizenship and to long-term Green Card holders who held the card for at least 8 of the last 15 tax years.
An H1B holder who returns to India does not face the Section 877A exit tax. However, the PFIC rules and dual-status filing requirements still apply, and getting those wrong can cost as much as an exit tax penalty would.
Do H1B visa holders pay taxes in India?
Yes, if you earn income in India during the financial year. While you are on H1B in the US, your US salary is generally not taxable in India unless you spent more than 182 days in India in that financial year.
In your return year, any India-sourced income such as NRO interest, rental income, or salary from an Indian employer is taxable in India. If you qualify as RNOR, your US salary earned before departure remains outside India's tax net for 2 to 3 years.
How can H1B holders returning to India avoid double taxation?
The India-US DTAA covers most common income types: salary, interest, dividends, and retirement distributions. For each type of income taxed in one country, you claim a credit in the other. In the US, use Form 1116. In India, file Form 67 before submitting your ITR. The process requires filing in the right sequence, and missing either form means you pay tax twice. Read the complete DTAA guide for NRIs for specific examples by income type.
What is the 240-day rule for H-1B?
The 240-day rule is an immigration rule, not a tax rule. It allows you to continue working for your current US employer for up to 240 days beyond your H-1B expiry date, provided you filed an extension petition before the expiry and the USCIS decision is still pending.
For US tax purposes, your residency status is determined by the Substantial Presence Test, not by your visa status or work authorization. Staying in the US under the 240-day rule still counts toward your US residency days.