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In our previous blog, we explored the concept of the Double Taxation Avoidance Agreement (DTAA) and highlighted the tax rates India shares with key countries. This time, we’re zooming in on the India–US treaty -DTAA—one of the most crucial tax treaties for individuals and businesses navigating cross-border income.
Are you living in India and earning income from the U.S.? Or perhaps you’re based in the U.S. with income flowing from India? If you’re dealing with taxes in both countries, you’re not alone. Many NRIs, expats, and global businesses face the headache of double taxation.
To ease this burden, India and the United States entered into a DTAA on December 18, 1990. This treaty aims to ensure that income isn’t unfairly taxed twice—once in the source country and again in the resident country. In plain English, it’s a smart legal framework that fosters cross-border economic activity by clearly defining how and where your income gets taxed.
For example, Mr X, a resident of India, works in the United States. In turn, Mr X is given some remuneration in the United States for the work done. Now, the US government levies the federal income tax on the income earned in the US. Since Mr X is a resident of India, the Indian government may charge income tax on the same amount, i.e. the remuneration earned abroad
There are numerous benefits of the DTAA overall for the government and the economy; however, we have listed the most important benefits for taxpayers of both countries here.
Let’s understand how and where this treaty benefits taxpayers of both countries, as outlined under this agreement.
This treaty applies only to individuals and entities who are residents of either India or the United States.
It explains the taxing rights and outlines where each type of income should be taxed. Some income is taxed only in the source country, some in the resident country, while some may be taxed in both, but with credit available in your home country for the tax paid abroad.
What is the source and resident country? Here’s the simple logic: If you’re earning income in one country, it’s referred to as the source country; however, if you live or are taxed in another country, it’s called the resident country
In India, the DTAA covers income tax, including any surcharges or cess.
In the United States, the DTAA covers federal income taxes, excluding the accumulated earnings tax, the personal holding company tax, and social security taxes.
The residential status of any person shall be determined as per the domestic tax law of that country. If any person becomes a resident of both countries, then their residential status shall be determined as follows:
For entities other than individuals – Residency shall be determined by competent authorities through the MAP, taking into account their POEM, place of incorporation, and other relevant factors.
PE (Permanent Establishment) is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on.
PE exists if the following conditions are satisfied cumulatively:
Remember that business profits are always taxable in the country of origin only if the enterprise has a permanent establishment (PE) in that country.
Nationals (any individual possessing the nationality or citizenship of a Contracting State) of one country are not to be subjected to more burdensome taxation in the other country than nationals of that other country in the same circumstances.
Example: If an Indian citizen is working temporarily in the U.S. and earning salary income, and a U.S. citizen is performing the same job under the same conditions, the U.S. tax rules must treat both individuals equally. The U.S. cannot impose extra taxes or stricter filing requirements just because the person is Indian.
Provides a mechanism for resolving disputes arising from the interpretation or application of the treaty.
If a person believes that actions taken by either one or both countries (India or the U.S.) result in taxation that violates the terms of the treaty, they can file a complaint, even if local laws allow no other appeal or solution.
They must raise this issue to the competent authority (usually the tax authority) of the country where they are a resident or a national. They must do so within three years of being notified of the problem.
For example – suppose you’re an Indian resident, and the U.S. withholds 30% tax on dividend income, even though the treaty says it should be 15%. You believe this is not in line with the treaty.You can file a MAP request with the Indian tax authority (CBDT), even if the U.S. law does not offer further relief.
So, how exactly does DTAA stop you from being taxed twice? It’s not just a handshake deal between countries—it involves specific mechanisms that offer relief to taxpayers. Under the India–USA Double Tax Agreement (DTAA), two primary methods are employed: the exemption method and the tax credit method. Let’s break them down for simple understanding-
Both countries provide relief from double taxation through the credit method, allowing taxpayers to claim a credit for taxes paid in one country against their tax liability in the other.
This method is what makes DTAA so practical—it adjusts your tax liability fairly, while keeping both countries satisfied.
The India–USA DTAA doesn’t just cover one or two types of income; it’s pretty broad. That means whether you’re earning through your job, investments, or intellectual property, there’s likely a DTAA provision that applies to you.
Here’s a quick rundown of the main categories –
If you’re earning income by working in one country while being a resident of the other, DTAA decides which country can tax that income, and often offers relief through credits or exemptions.
Income derived from immovable property is to be taxed in the country in which it is situated. The following is considered income from the immovable property:
According to the relevant provisions of the DTAA, a resident company may pay a dividend to a resident of another country if the dividend income is taxable in the country where the dividend is received. So, for example, India’s reward would be taxable if a US company paid it to an Indian shareholder. The dividend can be taxed in the country where it is paid. When a taxpayer resides in a receiving country, the tax on dividends cannot exceed the following:
If you earn interest on savings or deposits in the other country, DTAA typically allows the source country to withhold tax at a reduced rate (usually between 10–15%) instead of the standard higher rate.
Under the relevant provisions of DTAA, if interest income is derived from a country and paid to a resident of another country, it is taxable in the country where the recipient is a resident.
For example, if a U.S. resident earns interest on their income in India, it is taxable in the United States. Otherwise, there will be tax consequences. Although interest can also be taxed in the country from which it arises, the dividend tax cannot exceed the following amount if the beneficial owner is a country’s resident:
These depend on where the asset or business is located and where you’re a tax resident. The treaty helps decide which country has taxing rights and prevents both from taxing the full amount.
In this case, capital gains are subject to tax according to the country’s domestic laws. For example, if a US Resident, say, Miss Q, sells their Indian property in the market, then the property is liable to be taxed according to Indian domestic laws.
Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
This is common for consultants and businesses in the tech or IP sector. DTAA sets a maximum withholding tax rate, currently around 15%, for these payments.
For the first 5 years of the treaty:
From the 6th year onward: Flat 15% regardless of who pays
Note- fall under clause(a)- 12(3)(a)
These are royalties and FIS that are ancillary and subsidiary to the use of equipment (such as leasing technical equipment). The tax is capped at 10% of the gross amount.
Note: fall under clause(b) paragraph 3(b)
These refer to payments for the use of or right to use:
Note: falls under paragraph 3(a)
Also includes: Fees for Included Services (FIS) that are not ancillary or subsidiary to equipment use (i.e., standalone technical or consultancy services).
In short, DTAA applies to almost every kind of income you’d typically earn when dealing with another country, and that makes it essential for anyone living or working internationally.
India and the U.S. share a tax treaty designed to benefit individuals who live and work across borders, particularly those whose earning location is far from their home country or family. This treaty helps ensure fair and efficient tax planning while avoiding double taxation.
At Mercurius, we act as your trusted partner in navigating complex cross-border tax matters. Our experts help you determine your exact tax obligations in each country, based on your income type, residency status, and financial structure, ensuring compliance and optimized tax outcomes. This enables you to minimize your tax liability and save as much as possible.
For any assistance regarding this treaty between India and the US, or with any other country. You can Connect with us.
