Tax Implications and Best Practices

Summary

Remitting loan proceeds from the US to an NRE account in India is generally not considered taxable income in either country. Loans are liabilities, not earnings, and NRE accounts offer tax-exempt status and full repatriability.

1.Introduction to US-India Remittances

2.Is a Loan Treated as Taxable Income?

3.The Role of NRE and NRO Accounts

4.Tax Implications in the United States

5.Tax Implications in India

6.The New 2026 US Remittance Tax

Introduction to US-India Remittances

The corridor between the United States and India remains one of the world's most active remittance paths. For Non-Resident Indians (NRIs) living in the US, financial needs often bridge both nations, leading to scenarios where capital must be moved across borders. One common situation involves taking a loan in the US—whether for personal use, investment, or family support—and remitting those funds to India. Understanding the tax landscape is crucial to avoid unnecessary liabilities and ensure smooth cross-border transfers.

Is a Loan Treated as Taxable Income?

The fundamental principle of taxation in both the US and India is that only "income" is subject to tax. A loan, by definition, is a debt obligation that must be repaid. Because the recipient of the loan proceeds has a corresponding liability to the lender, the money received does not increase the individual's net worth in a way that constitutes income. Therefore, the act of receiving loan proceeds and subsequently remitting them to India does not trigger an income tax event.

The Role of NRE and NRO Accounts

When remitting funds to India, the choice of bank account is paramount. NRIs typically use Non-Resident External (NRE) or Non-Resident Ordinary (NRO) accounts. For loan proceeds, the NRE account is highly recommended. Funds in an NRE account are tax-exempt in India, and both the principal and interest are freely repatriable, meaning you can move the money back to the US without seeking specific RBI permission. In contrast, NRO accounts are used for income earned in India and have more stringent repatriation limits.

Tax Implications in the United States

From the perspective of the Internal Revenue Service (IRS), the remittance of your own funds—including loan proceeds—is not a taxable event. However, the US government monitors large transfers to prevent money laundering and tax evasion. Transfers exceeding $10,000 are routinely reported by financial institutions under the Bank Secrecy Act. While this reporting does not mean you owe tax, it ensures transparency. Additionally, if you are an American citizen or resident alien, you must still report global income, though the loan itself remains a non-taxable liability.

Tax Implications in India

In India, the Foreign Exchange Management Act (FEMA) governs how NRIs can move money. Remittances from abroad into an NRE account are not taxed. The Income Tax Act of India also clarifies that foreign-sourced funds sent to India by an NRI are not taxable as Indian income. It is advisable to maintain clear documentation of the loan agreement and the transfer trail to satisfy any potential inquiries from the Income Tax Department regarding the source of funds.

The New 2026 US Remittance Tax

As of January 1, 2026, a new federal excise tax of 1% applies to certain international money transfers sent from the US. This tax specifically targets transfers initiated through physical payment methods like cash. Fortunately for most professionals, transfers made via bank accounts or digital platforms remain exempt from this specific excise tax. It is essential to verify with your remittance provider whether your chosen method incurs this new cost.