Filing as an NRI means juggling two tax systems, and one wrong assumption gets expensive. The costliest mistake here is treating an Indian mutual fund or ULIP like an ordinary US investment. Skip Form 8621, and the IRS defaults you into the punitive excess distribution regime under Section 1291.
Here's what else causes NRI tax filing mistakes on both sides of the border, and how to check if you're exposed.
Mistake 1: treating Indian mutual funds like ordinary investments
What people do: they hold an Indian mutual fund, ULIP, or NPS-linked fund and report it the way they'd report a US brokerage account, or skip reporting it entirely because no 1099 arrived.
Under US tax law, most Indian mutual funds meet the PFIC (passive foreign investment company) test, since they hold over 50% passive assets. That pulls in Form 8621, filed per fund, per year.
Miss it, and you default into the excess distribution regime under Section 1291. That taxes gains at the highest marginal rate for each year held, plus interest.
The fix: file Form 8621 for every PFIC in the first year you hold it. Make a QEF or mark-to-market election before your first sale, if the fund's data supports it.
Say Arjun holds three India equity funds worth ₹40 lakh and has never filed an 8621 for any of them. Once he's past the first sale without an election, the cheap option is gone. He's now working out excess distribution tax on every prior year, not just catching up on paperwork.
Read more on what counts as a PFIC before you decide how to hold Indian investments going forward. Already past the point of prevention? What actually happens if you never filed covers the fix, not just the rule.
Mistake 2: under-reporting foreign accounts on the FBAR
What people do: they report their own NRE and NRO accounts on the FBAR, then leave off a joint account with a parent, an old FCNR deposit, or a signing-authority account they rarely touch.
FinCEN 114 asks for every foreign financial account where you hold a financial interest or signature authority. That applies once the combined balance across all of them tops $10,000 at any point in the year.
It doesn't matter that you never withdraw from the joint account, or that the balance sits mostly in your parent's name. Signature authority alone triggers the filing.
The fix: list every account you can access, not just the ones funded with your own money. File by October 15 if you missed the April 15 deadline.
Catching up on several past years at once? The streamlined and delinquent submission procedures exist for non-willful gaps like this. Amending everything from scratch isn't the only path forward.
Mistake 3: mixing up FBAR and Form 8938
What people do: they file the FBAR and assume that covers their foreign-asset disclosure obligation, or file Form 8938 with their return and skip the FBAR because "I already reported this."
These are two different filings, to two different agencies, with two different thresholds. FBAR goes to FinCEN past $10,000 aggregate.
Form 8938 goes to the IRS with your return. The threshold depends on filing status and residence, commonly $50,000 at year end for a single filer living in the US, and higher for those abroad or filing jointly.
You can clear one threshold and not the other. See FBAR vs FATCA for the full threshold table by filing status.
The fix: check both thresholds separately every year, since account balances that grow past one line often cross the other soon after.
Mistake 4: filing ITR-1 when foreign assets rule it out
What people do: they file ITR-1 (Sahaj) in India because it's the form their software defaults to, without checking whether a 401(k), an IRA, or a US brokerage account disqualifies them.
Holding any foreign asset, including a retirement account, takes ITR-1 and ITR-4 off the table. The correct form is ITR-2, or ITR-3 if there's business or professional income.
Filing the wrong form doesn't just look sloppy. The department can flag it as defective, exposing you to the Section 234F late fee: up to ₹5,000, or ₹1,000 where income doesn't exceed ₹5 lakh.
The fix: once you hold any account or asset outside India, plan for ITR-2 by default. Treat "which form" as a residency-status question, not a software default.
This is one place where the whole US and India timeline matters together. See how the move-year filing sequence works if you're filing both returns in the same year you relocated.
Mistake 5: missing the Form 67 deadline, or assuming DTAA relief is automatic
What people do: they pay US tax on India-sourced income, assume the DTAA (double tax avoidance agreement) between the US and India prevents them from paying twice, and stop there.
DTAA Article 13 doesn't exempt capital gains from double taxation. Each country still taxes under its own domestic law, and the relief comes through a foreign tax credit, not an exemption.
In India, that means filing Form 67 on or before the return deadline, to claim credit for US tax already paid under Sections 90 and 91. File late, and the credit can be denied outright, leaving you taxed twice.
If your gap is a documentation issue rather than a missed form, these treaty mistakes are worth checking too.
The fix: file Form 67 before your India return, not after, and keep your US tax payment documentation ready to attach. Form 67 is being renumbered Form 44 from April 2026, so confirm which one applies to the year you're filing.
Mistake 6: skipping the Section 89A election on a 401(k) or IRA
What people do: they become a Resident and Ordinarily Resident in India and let their 401(k) or IRA sit without electing deferral, so India taxes the account's annual growth even though nothing has been withdrawn.
Section 89A, elected by filing Form 10-EE before your ITR, defers Indian taxation of specified foreign retirement accounts to the year you actually withdraw. That matches US timing instead of taxing phantom annual growth. It applies to accounts in the US, UK, and Canada.
Miss the election, and India taxes the account every year on paper gains you haven't touched, money you can't easily get back once filed.
I'd elect Form 10-EE the same season you become ROR, not the year you plan to withdraw. The election is irrevocable once made, and waiting gains you nothing.
How to check whether these NRI tax filing mistakes affect you
How to check whether these NRI tax filing mistakes affect you
| Mistake | Form | Deadline | If missed |
|---|---|---|---|
| PFIC / Indian mutual fund | Form 8621 | Same year as your US return, once per fund | Default excess distribution tax under Section 1291 |
| Foreign accounts under-reported | FBAR (FinCEN 114) | April 15, auto-extended to October 15 | Streamlined and delinquent submission procedures exist for non-willful gaps |
| FBAR and Form 8938 confused | Form 8938 | Filed with your US return | Separate exposure from FBAR, on a different threshold |
| Wrong ITR form in India | ITR-2 or ITR-3 | Same season as your India return | Return can be treated as defective |
| Form 67 deadline missed | Form 67 (Form 44 from April 2026) | Before your India return | Foreign tax credit denied for that year |
| Section 89A not elected | Form 10-EE | Before your ITR, once you're ROR | Account taxed on paper gains every year until withdrawn |
Run through these before you file, in order:
- Do you hold any Indian mutual fund, ULIP, or similar pooled investment? If yes, you likely need Form 8621 per fund.
- Add up every foreign account you can sign on, including joint and family accounts. Past $10,000 combined, FBAR applies.
- Check your Form 8938 threshold separately from your FBAR threshold. They're not the same number.
- Do you hold a 401(k), IRA, or other foreign asset and file in India? ITR-1 and ITR-4 are off the table.
- Did you pay US tax on India-sourced income this year? Form 67 needs to go in before your India return, not after.
- Are you ROR in India with a US retirement account you haven't started withdrawing from? Check whether Form 10-EE was filed.
Next step
Pull your last filed FBAR and your last India ITR. Check them against the six mistakes above, starting with whichever touches an account you haven't looked at closely in a while.
I'd rather you catch a gap here than in a notice two years from now. If you're not sure how deep the exposure runs, that's a judgment call worth bringing to an advisor before you file next, not after.
Frequently asked questions
Is a joint NRE account with a parent in India still reportable on my FBAR?
Yes. Signature authority or a financial interest in the account is what triggers FBAR reporting, not whose money funds it or who makes the withdrawals. A joint NRE account with a parent counts toward your $10,000 aggregate the same as an account in your own name.
Do I need to claim India's foreign tax credit separately if I already used Form 1116 in the US?
Yes. Form 1116 claims a US credit for foreign tax paid to India. Form 67 claims an India credit for US tax paid.
They run in opposite directions, and neither substitutes for the other. Paying US tax doesn't automatically reduce what India assesses unless you file Form 67 to claim it.
Does Section 89A deferral still apply if I already started 401(k) withdrawals?
Section 89A defers taxation to the year of withdrawal, so once withdrawals have started, that income becomes taxable in India in the year received rather than deferred further. The election still matters for any portion of the account you haven't yet drawn down.