I am a US citizen of Indian origin. I recently opened an account in India for buying a CD. The bank in India applies tax on the interest income in the account. So, do I have to declare the Indian account in Federal Taxes and also pay US taxes? Someone mentioned that there is some tax treaty between US and India. But I am not sure.

Appreciate response. Thanks.

Yes, you must report this income on your U.S. tax return. You will also file Form 1116 to claim credit for the taxes paid in India. Read: Your U.S. Tax Return: U.S. Citizen or Resident with Foreign Income (http://taxipay.blogspot.com/2008/03/us-citizen-or-resident-with-foreign.html)

Thanks for the advice. Since the money is listed in the bank statement in Rupees, it has to converted in Dollars for tax purposes. So what day's exchange rate should be used. Should the exchange rate prevailing on the day the taxes are filed should be used or any day' rate.

Appreciate your response.

You will use the conversion rate on the date your received the interest. Use rate at which you will convert Rs. To USD.
For India taxes: mytaxes - Index (http://mytaxes.in)

While working with TurboTax on this issue I was stumped by its responses that is confusing.

First, it says that "Since the total value of your interest in foreign accounts did not exceed $10000, you are not required to file Form TD F 90-22.1 for 2008."

Secondly, it says that "You may not have to complete the Foreign Tax Credit Computation Worksheet in order to claim the foreign tax credit if your foreign taxes paid amount to $600 or less."

Since the dollar value of my NRO account is less than $10000 and the interest taxes are less than $600, do I still have to show the interest income of about $330 in my taxes? Because, when I put this interest income it applies US taxes too.

Thanks.

Yes, when you add interest income, it will apply U.S. taxes. Then when you complete Form 1116, you will get some foreign tax credit.