DTAA Between India and USA – Avoiding Double Taxation for NRIs

For many Indians working, studying, or investing in the United States, taxation becomes a complicated matter. Income may arise in both India and the USA, which often creates confusion about whether tax must be paid twice. To resolve such issues, the governments of both countries have entered into a Double Taxation Avoidance Agreement (DTAA).

The India–USA DTAA ensures that taxpayers do not pay tax on the same income in both countries, while also preventing tax evasion. Let’s explore the key provisions and benefits of this treaty.

What is DTAA?

DTAA (Double Taxation Avoidance Agreement) is a bilateral agreement between two countries that defines how income earned in one country will be taxed in another. Its primary goal is to:

• Eliminate double taxation on the same income

• Allocate taxing rights between both countries

• Encourage cross-border trade and investments

• Provide relief to taxpayers by avoiding excessive tax burdens

Applicability of India–USA DTAA

The dtaa between india and usa applies to individuals and entities who are residents of either country but earn income in the other.

In India, the agreement covers:

• Income Tax (including surcharge)

In the USA, it applies to:

• Federal Income Taxes imposed by the Internal Revenue Code

It does not cover state-level taxes in the USA or local taxes in India.

Types of Income Covered Under India–USA DTAA

The treaty provides taxation rules for different categories of income, such as:

1. Salary Income – Taxed where services are performed, subject to certain conditions.

2. Business Profits – Taxable in the source country only if there is a “Permanent Establishment.”

3. Dividends – Taxed at a reduced rate (generally 15%) in the source country.

4. Interest Income – Usually taxed at a concessional rate of 10% in the source country.

5. Royalties & Fees for Technical Services (FTS) – Taxed at a reduced rate (generally 15%).

6. Capital Gains – Typically taxed in the country where the capital asset is located.

7. Other Income – Specific provisions apply depending on the nature of income.

Relief Methods Under DTAA

DTAA provides relief through two primary methods:

1. Exemption Method – Income is taxed in only one country and exempted in the other.

2. Tax Credit Method – Income is taxed in both countries, but the country of residence allows a credit for the tax paid in the source country.

In practice, India generally follows the Tax Credit Method, where tax paid in the USA can be claimed as credit against Indian tax liability, and vice versa.

Benefits of India–USA DTAA

1. Avoidance of Double Taxation – Ensures the same income is not taxed twice.

2. Reduced Withholding Tax Rates – Lower tax rates on dividends, interest, and royalties encourage investment.

3. Certainty and Transparency – Clear rules on which country has taxing rights.

4. Encouragement of Cross-Border Trade – Easier taxation rules promote trade and business relations.

5. Tax Credits – NRIs can claim foreign tax credits in their country of residence.

Compliance Requirements

To claim DTAA benefits, taxpayers must:

• Obtain a Tax Residency Certificate (TRC) from the country of residence.

• File Form 10F and self-declaration while claiming DTAA benefits in India.

• Maintain necessary documents, such as proof of taxes paid abroad.

Example

Suppose an NRI residing in the USA earns interest income from India of ₹5,00,000.

• Under DTAA, India may levy 10% TDS = ₹50,000.

• The same income will also be taxable in the USA.

• However, the taxpayer can claim a foreign tax credit in the USA for the ₹50,000 already paid in India.

This way, tax is not paid twice on the same income.

Conclusion

The DTAA between India and the USA plays an essential role for NRIs, investors, and businesses by eliminating double taxation and providing tax relief. It ensures fairness, promotes international trade, and gives clarity on taxation rules.

For NRIs with income in both countries, understanding DTAA provisions and maintaining proper documentation is crucial to claim benefits effectively. Professional advice is often recommended to maximize tax relief and remain fully compliant with both Indian and US tax laws.