Many NRIs living or working in India are unaware that they may still have U.S. tax obligations. The Foreign Earned Income Exclusion (FEIE) helps U.S. citizens and Green Card holders reduce or eliminate U.S. tax liability on income earned abroad.

This step-by-step guide explains what the FEIE is, who qualifies, how to claim it, and the important things U.S.-based NRIs must keep in mind while working or living in India.

Step 1: Understand What FEIE Means

The Foreign Earned Income Exclusion allows U.S. taxpayers to exclude a certain amount of income earned abroad from U.S. taxation.

For 2025, the maximum exclusion is $130,000 per person. If both spouses qualify, they can claim up to $260,000 in total.

This exclusion is claimed using IRS Form 2555 and filed along with the annual U.S. tax return (Form 1040).

Step 2: Know Who Can Qualify

To claim the FEIE, all three of the following conditions must be met:

1. Foreign Earned Income: You must earn wages, salaries, or self-employment income from working outside the U.S. Passive income like rental income or dividends does not qualify.
2. Foreign Tax Home: Your tax home must be in a foreign country. This means your main place of work and business is outside the United States.
3. Meet One of Two Tests:
• Physical Presence Test: You must be present in a foreign country for at least 330 full days in a 12-month period.
• Bona Fide Residence Test: You must be a resident of a foreign country (like India) for an entire calendar year and show long-term intent to live there.

Step 3: Check What Income Qualifies

Only earned income qualifies for FEIE. Examples include:

• Salary from an Indian employer
• Freelance or consulting income
• Income from self-employment or business work in India

Income that does not qualify:

• Dividends and interest
• Capital gains
• Rental income
• Social Security or pensions
• U.S. government or military pay

Step 4: Know About the Foreign Housing Exclusion

In addition to FEIE, you may also claim a foreign housing exclusion or deduction.

This is available to cover qualified housing costs such as:

• Rent
• Utilities (except telephone)
• Housing repairs

This can be claimed if your housing expenses exceed a base amount set by the IRS and can further reduce your taxable income.

Step 5: Compare FEIE vs Foreign Tax Credit (FTC)

If you are paying taxes in India, you may also consider the Foreign Tax Credit (FTC) instead of FEIE.

• FEIE excludes earned income from taxation.
• FTC gives credit for taxes paid in India on foreign income.

You can use both, but not for the same income. FEIE applies to earned income, and FTC is helpful for passive income or income above the FEIE limit.

Step 6: Learn How to File for FEIE

To claim the Foreign Earned Income Exclusion, you must:

• File IRS Form 2555
• Attach it to your Form 1040 U.S. tax return
• Meet the requirements of either the Physical Presence or Bona Fide Residence test

If you haven’t met the 330-day requirement by April 15, you can request an extension using Form 4868, which gives time until October 15.

Step 7: Be Aware of Common Mistakes

1. Not filing a U.S. tax return – Even if your foreign income is below the exclusion limit, you must file to claim it.
2. Revoking FEIE – Once revoked, you cannot claim it again for 5 years unless you get special IRS permission.
3. Incorrect day counting – If you use the Physical Presence Test, make sure you have accurate travel records.
4. Assuming FEIE covers self-employment tax – It doesn’t. You may still owe U.S. self-employment tax unless covered under a U.S.-India totalization agreement.
5. No IRA contributions – Excluded income under FEIE is not considered “taxable compensation,” which may limit your ability to contribute to retirement accounts like IRAs.

Step 8: Continue Using It Every Year

Once you claim FEIE, you must continue using it each year unless you formally revoke it. If you miss claiming it in a future year without revoking, you may lose the right to claim it for five years.

Step 9: Get Expert Help if Needed

Filing Form 2555 and navigating U.S.-India tax laws can be complex. If you are unsure whether to claim FEIE or FTC, or how to report income correctly, consult a tax professional who understands both IRS rules and Indian tax laws.

Need Help?

India for NRI works with licensed U.S. CPAs and Indian Chartered Accountants who specialize in cross-border taxation for NRIs. We can help you:

• Maximize tax savings with FEIE or FTC
• File Form 2555 and U.S. tax returns from India
• Manage self-employment and business taxes across borders
• Repatriate funds and file capital gains from Indian property
• Avoid double taxation legally and efficiently