Many NRIs assume the DTAA between India and USA simply means they will never pay tax twice. In reality, the treaty determines which country can tax specific income and how the other country provides relief through tax credits or treaty exemptions. Understanding these rules can help avoid excess tax, rejected foreign tax credits and unnecessary notices. This guide explains the key India-US DTAA provisions, how they apply to different types of income, and the common mistakes taxpayers should avoid.

What is DTAA Between India and USA?

The India-USA Double Taxation Avoidance Agreement (DTAA) is a bilateral tax treaty signed on 12 September 1989 and effective from 18 December 1990. It provides rules for determining how income connected with both India and the USA is taxed.

The treaty does not make income tax-free in either country. Instead, it helps prevent the same income from being fully taxed twice by allocating taxing rights, limiting certain withholding rates, or allowing taxpayers to claim a Foreign Tax Credit for tax paid in the other country.

For NRIs, US citizens and other cross-border taxpayers, the India-USA DTAA can be important when determining the tax treatment of salary, dividends, interest, capital gains, pensions and other income.

How Does DTAA Between India and USA Work?

The DTAA between India and USA helps prevent taxpayers from paying full tax twice on the same income. Relief generally works in two ways, depending on the specific treaty article and type of income.

Income Taxable Only in One Country

Certain income may be taxable exclusively in one country under the treaty. For example, some independent professional income and private pensions may be taxable only in the taxpayer's country of residence, subject to the conditions of the relevant article. In such cases, there is generally no foreign tax credit because the other country does not have taxing rights.

Foreign Tax Credit Under Article 25

Where both India and the USA have taxing rights, Article 25 provides foreign tax credit relief. A taxpayer may generally claim credit for qualifying tax paid in the other country, subject to treaty and domestic-law limits.

The key point is that India-USA DTAA relief is not a blanket tax exemption. The applicable treaty article determines whether income is taxed in one country or whether foreign tax credit relief applies.

Real-Life Example: Mr. Y, an Indian resident, earns $10,000 of interest from US investments and pays eligible US tax on that income. If the same interest is taxable in India, he may generally claim credit for the qualifying US tax paid, limited to the Indian tax attributable to that income.

Therefore, the relevant treaty article must be reviewed before determining whether exemption or foreign tax credit relief is available.

Who Is Eligible for DTAA Between India & USA?

The DTAA between India & USA can apply to individuals and entities that qualify as residents of India, the USA, or both countries, subject to the treaty's specific conditions. Eligibility generally depends on residential status, type of income and the relevant treaty article.

• Indian residents earning eligible income from the USA.
• US residents or citizens earning eligible income from India.
• Individuals receiving salary, interest, dividends, pensions, royalties or business income covered by the treaty.
• Taxpayers who satisfy applicable residency and treaty requirements.
• Persons claiming treaty benefits who can provide required documentation, including a Tax Residency Certificate (TRC) where applicable.

DTAA eligibility should always be assessed based on the taxpayer's specific income and circumstances.

Taxes Covered Under the DTAA Between India and USA

The DTAA between India and USA does not apply to every tax imposed by either country. Article 2 specifies the taxes covered by the treaty and identifies certain exclusions. This distinction is important because treaty relief is generally available only for taxes within the Convention's scope.

US Taxes Covered

The treaty generally covers US federal income tax under the Internal Revenue Code. It also covers certain excise taxes on insurance premiums paid to foreign insurers, subject to specific conditions. Accumulated earnings tax, personal holding company tax and Social Security taxes are excluded.

Indian Taxes Covered

On the Indian side, the treaty covers Indian income tax, including applicable surcharge, while excluding tax on undistributed company income. The treaty also specifically covers the erstwhile Companies (Profits) Surtax.

Article 2(2) further extends coverage to later taxes that are identical or substantially similar to the taxes covered by the Convention.

Types of Income Covered Under the India-US DTAA

The India-US DTAA provides specific rules for different categories of cross-border income. Depending on the relevant treaty article, income may be taxable in India, the USA, or both, with relief available where applicable.

• Salary and employment income
• Business profits
• Interest and dividends
• Capital gains
• Royalties and fees for technical services
• Pensions and annuities
• Independent professional services
• Income from immovable property
• Government service income

The applicable treaty article determines the taxing rights and available relief for each income type.

India-US DTAA Withholding Tax Rates on Dividends, Interest and Royalties

Where both countries can tax specific income, the treaty may limit the withholding tax that the source country can impose. Articles 10, 11 and 12 provide specific rules for dividends, interest, royalties and fees for included services.

These treaty rates generally depend on the taxpayer being the beneficial owner of the income. This means the person must generally have the right to use and enjoy the income rather than merely receiving it as a nominee or conduit.

India-US DTAA Capital Gains Tax on Property, Shares and Mutual Funds

Capital gains are an important area to understand under the India-US DTAA, particularly for NRIs selling Indian property, shares or mutual funds. Article 13 generally allows India and the USA to tax capital gains according to their respective domestic tax laws. The treaty does not prescribe a separate capital gains tax rate or provide a special reduced rate.

In practice, an NRI selling an Indian asset must consider India's applicable capital gains rules, including STCG/LTCG classification, holding-period requirements and Section 195 TDS.

If the same gain is also taxable in the USA, Article 25 may provide foreign tax credit relief for eligible Indian tax paid, subject to US tax rules and applicable limitations.

Permanent Establishment and Business Profits Under the India-USA DTAA

For NRIs and businesses operating in both India and the USA, Articles 5 and 7 of the India-USA DTAA help determine when business profits may be taxed in the other country.

A Permanent Establishment (PE) can include an office, branch, factory, or certain construction and service activities. Key thresholds include:

• Construction or installation projects: Generally become a PE when they continue for more than 120 days within a 12-month period.
• Services through employees: May create a PE when activities exceed 90 days within a 12-month period, subject to treaty conditions.
• Related enterprises: Specific service activities for a related enterprise may trigger PE rules regardless of duration, subject to the applicable treaty provisions.

Under Article 7, the other country generally taxes only the business profits attributable to the PE, subject to the treaty's detailed provisions.

India-USA DTAA: 90-Day vs 183-Day Test for Professional and Employment Income

The 90-day and 183-day tests under the India-USA DTAA apply to different types of work. The correct test depends on whether you are an independent professional or an employee.

• Article 15 - Independent Personal Services: Applies to consultants, doctors, lawyers, engineers, accountants and other independent professionals. Income is generally taxable only in the home country unless the individual has a fixed base in the other country or is present there for 90 days or more during the relevant period.
• Article 16 - Dependent Personal Services: Applies to employees. Salary may remain taxable only in the home country if the employee is present in the other country for 183 days or less, the employer is not a resident there, and the remuneration is not borne by a PE there.

Example: A self-employed Indian consultant working temporarily in the USA considers the 90-day test, while an employee working temporarily in India for a US company considers the 183-day test.

How to Claim DTAA Benefits in India: Step-by-Step

NRIs claiming DTAA benefits should first confirm treaty eligibility and then complete the required documentation and reporting. A structured approach can help avoid errors and delays.

1. Check treaty eligibility: Identify the relevant DTAA article and determine whether relief applies through exclusive taxing rights or a Foreign Tax Credit under Article 25.
2. Obtain a TRC: Obtain the applicable Tax Residency Certificate (TRC) and submit Form 10F where required.
3. File Form 67: Report the foreign income and foreign tax paid through Form 67 before filing the Indian ITR, where required for claiming foreign tax credit.
4. Keep supporting documents: Maintain your US tax return, withholding or tax-payment proof, TRC and Form 10F.
5. File the ITR correctly: Report the foreign income and eligible tax credit in the appropriate schedules of your Indian income-tax return.

Proper documentation is essential to support a DTAA claim.

How to Report DTAA Income in Your ITR?

Correctly reporting foreign income and taxes paid is essential when claiming DTAA relief between India and the USA. The relevant ITR schedules should be completed consistently with your supporting documents.

• Schedule FSI: Report foreign-source income and the corresponding foreign tax paid, country-wise.
• Schedule TR: Claim eligible foreign tax credit under Section 90 and the applicable DTAA, generally subject to prescribed credit limits.
• Schedule FA: Where applicable, disclose specified foreign assets and accounts, such as foreign bank accounts and brokerage holdings.

These schedules should match your Form 67, tax-payment records and supporting documents. Inconsistencies between foreign income, tax paid and the credit claimed can result in the DTAA claim being questioned or delayed during processing.

Common India-US DTAA Mistakes That Can Cause Tax Issues

Avoiding common India-US DTAA mistakes can help NRIs prevent incorrect claims, rejected foreign tax credits and unnecessary tax notices.

• Filing Form 67 late: Claiming foreign tax credit without completing Form 67 within the prescribed timeline can create compliance issues.
• Assuming reduced capital gains rates: Article 13 generally leaves capital gains taxation to the domestic laws of India and the USA.
• Mixing up the 90-day and 183-day tests: The 90-day test generally relates to independent personal services, while the 183-day test applies to employment income.
• Claiming credit for non-qualifying US taxes: Not every US tax is covered by the treaty, so verify whether the tax paid qualifies for credit.
• Treating DTAA relief as automatic: Treaty benefits require proper eligibility assessment, documentation and reporting, including TRC, Form 10F and Form 67 where applicable.

Careful treaty analysis and accurate documentation can significantly reduce DTAA-related tax complications.

Conclusion

Understanding the DTAA between India and USA helps NRIs determine taxing rights, claim eligible foreign tax credits and avoid unnecessary double taxation. Each income type must be assessed under the relevant treaty article and applicable Indian and US tax rules.

Dinesh Aarjav and Associates provides NRI tax advisory services for India-US cross-border taxation, helping NRIs navigate DTAA provisions, documentation, foreign tax credits and ITR compliance with greater clarity and confidence.