DTAA Between India and USA – A Comprehensive Guide for NRIs

 

For many Indians living or working in the United States, taxation can be a complex issue. Income earned in India, such as rent, interest, or dividends, is also potentially taxable in the USA. Without proper provisions, this could lead to double taxation – paying tax on the same income in both countries. To address this, India and the USA signed a Double Taxation Avoidance Agreement (DTAA).

DTAA provides clear guidelines on taxing rights, reduces tax rates, and ensures that taxpayers are not unfairly taxed twice on the same income.

What is DTAA?

Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty between two countries to prevent the same income from being taxed twice.

Without a DTAA:

• Income earned in India by a US resident could be taxed in both India and the USA.

• Investors and NRIs may face higher tax burdens and compliance challenges.

The DTAA between India and the USA ensures:

• Relief from double taxation

• Reduced withholding taxes on dividends, interest, royalties, and technical fees

• Clear rules on which country has primary taxing rights

Who Can Avail Benefits Under DTAA?

DTAA applies to:

• Individuals who are residents of either dtaa between india and usa

• Companies or entities earning income in both countries

It is particularly useful for:

• NRIs earning from property, business, or investments in India

• Indian expatriates working in the USA

• Businesses engaged in cross-border trade or consultancy

Note: The treaty primarily covers federal taxes in the USA and income tax in India; state-level taxes in the USA or local taxes in India are not included.

Categories of Income Covered

The DTAA provides specific rules for various types of income:

1. Salary Income

• Taxed in the country where employment is exercised

• Exception: If an employee stays in the other country for fewer than 183 days in a year and salary is paid by a non-resident employer, taxation may shift to the country of residence

2. Business Profits

• Taxable in the country of residence unless there is a Permanent Establishment (PE) in the other country

• Example: A US company operating a branch in India will pay tax in India on profits attributable to that branch

3. Dividends

• Taxed at a reduced withholding rate, generally 15% in the source country

• Tax credit is available in the country of residence

4. Interest Income

• Taxed at 10% in the source country

• Covers bank deposits, bonds, and loans

5. Royalties & Fees for Technical Services (FTS)

• Taxed at a 15% reduced rate in the source country

• Applies to payments for patents, copyrights, know-how, or consultancy

6. Capital Gains

• Taxable in the country where the asset is located

• Example: Sale of property in India by an NRI is taxable in India, but credit is available in the USA

Relief Mechanisms Under DTAA

The India–USA DTAA uses two main methods to avoid double taxation:

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

2. Tax Credit Method – Income is taxed in both countries, but taxes paid in the source country can be claimed as credit in the country of residence.

India generally follows the Tax Credit Method, allowing NRIs to reduce US tax liability for taxes paid in India.

Benefits of DTAA

• Avoids Double Taxation – Protects taxpayers from being taxed twice on the same income.

• Reduces Withholding Taxes – Lower rates on dividends, interest, royalties, and technical fees.

• Clarity and Certainty – Clear rules reduce disputes and compliance challenges.

• Promotes Investment – Encourages NRIs and businesses to invest and operate in both countries.

• Tax Credit Availability – Taxes paid in one country can offset tax liability in the other.

Compliance Requirements

To claim DTAA benefits, NRIs must:

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

• File Form 10F and provide a self-declaration when claiming DTAA benefits in India.

• Maintain proof of taxes paid abroad, such as Form 1040 in the USA or Form 16A in India.

Without proper documentation, DTAA benefits may be denied.

Practical Example

An NRI living in the USA earns ₹6,00,000 interest from an Indian bank account:

• India deducts 10% TDS, i.e., ₹60,000

• The same income is taxable in the USA

• Under DTAA, the taxpayer can claim foreign tax credit of ₹60,000 in the USA

This ensures the NRI is not taxed twice for the same income.

Challenges in DTAA Application

• Different interpretations by Indian and US tax authorities

• Complex documentation process

• US state taxes are not covered

• Dual residency or frequent movement between countries may complicate taxation

Why DTAA is Important

For NRIs and expatriates, the India–USA DTAA:

• Prevents double taxation

• Lowers tax burden on cross-border income

• Provides clarity on which country can tax which income

• Makes investment and business planning easier

NRIs earning from property, deposits, dividends, or technical services in India benefit greatly from understanding DTAA provisions.

Conclusion

The DTAA between India and the USA is a vital agreement for NRIs and businesses operating across the two countries. By eliminating double taxation, reducing withholding taxes, and clarifying taxing rights, it ensures fair taxation and promotes cross-border investment.

For NRIs, understanding DTAA rules and maintaining proper documentation is crucial to maximize tax relief and comply with both Indian and US tax laws. With proper planning, income earned in both countries can be managed efficiently without unnecessary duplication of tax liability.