Do I have to pay taxes on PPF in USA?
I am going to work on H-1B in US for next 3 years. I am sure that I will return to India after 3 years and do not want to permanently settle in US.
In order to invest money in India I am planning to open a PPF account and then invest money in it every year. Since I am not an NRI at present I can open PPF account and NRIs are allowed to invest money in PPF in India so I will be able to invest money every year in it.
I know that interest earned on PPF is tax free in India. But since I will be staying in US for consecutively 3 years I will pass the substantial presence test in US and will be treated as resident alien for tax purposes.
Do I need to pay taxes in US on the interest earned on the PPF?
EDIT
The interest is earned by me while in US but cannot be withdrawn. It causes the confusion to pay tax or not and when to pay.
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Yes, it will be taxable in the US. You will report your worldwide income, and will be able to take credit for any Indian tax paid. However, the portions that are tax-free in India will be fully taxable for you in the US.
Keep in mind, in addition to the taxes, the FBAR requirements and the FATCA forms you may need to be filing as well. Failure to file (regardless of if any tax is actually owed) will trigger a K penalty.
I suggest you have a US-licensed EA/CPA (tax adviser) to help you with your US tax return. Keep in mind that a "regular" American tax preparer knows very little of the specific requirements for foreigners and may land you in trouble. Similarly, the "off-the-shelf" tax software or tax preparation outlets (like H&R Block) are ill-suited for foreigners in the US. It would be best to talk to a EA/CPA who is also familiar with Indian financial terms and Indo-US tax treaty.
You will need to file a US income tax return, and declare all income world-wide. Whether this results in any tax owed depends on your particular circumstances, and the effect of any tax treaties between the US and India.
There are additional requirements for the filing of information on the amounts in foreign accounts held by "US tax persons". Depending on the nature of these accounts, the complexity of the forms, and the penalties for non-compliance can be quite high...
Short version: Consult a professional well-qualified in US/India tax matters...
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