India-US DTAA: How the Tax Treaty Works for NRIs and Businesses#
The Double Taxation Avoidance Agreement (DTAA) between India and the United States does not exempt cross-border income from tax in either country — it decides which country gets primary taxing rights, and ensures the other country gives credit for tax already paid, so the same income isn't taxed twice at full rates in both jurisdictions.
This matters most for NRIs with US-source income (like US-based salary, investment income, or a US pension) who remain tax residents of India, and for Indian businesses earning income from US clients or operations.
How Relief Actually Works: Two Methods#
The treaty (and India's domestic law under Section 90) provides relief through one of two mechanisms, depending on the type of income:
- Exemption method — income is taxed in only one country, and the other country exempts it entirely.
- Credit method — income is taxed in both countries as per each country's domestic law, but the country of residence gives a credit for tax already paid in the source country, up to the amount of tax that would otherwise be payable there. This is the more commonly used method under the India-US treaty for investment-type income.
Key Tax Rates Under the Treaty#
The treaty caps the source-country withholding rate on certain categories of income (these are ceilings — actual domestic rates may be lower):
- Dividends: Up to 25% generally, reduced to 15% where the recipient is a company holding at least 10% of the voting stock of the paying company.
- Interest: Capped at 15% in most cases (lower rates apply for interest paid to government bodies or in specific financial-institution scenarios defined in the treaty).
- Royalties and fees for included services: Capped at 15% on the gross amount.
- Business profits: Taxable in the other country only if the enterprise has a Permanent Establishment (PE) there — a fixed place of business, dependent agent, or similar presence — and then only to the extent the profits are attributable to that PE.
These caps override the higher rates that might otherwise apply under each country's own domestic tax law, provided the treaty benefit is properly claimed.
Claiming Treaty Benefits: What's Actually Required#
Simply being an NRI or having cross-border income doesn't automatically apply the treaty rate — it has to be claimed, and documented:
- Tax Residency Certificate (TRC): Obtained from the tax authority of the country you claim residency in (the IRS for US residency). Indian tax authorities require this as a threshold condition before allowing treaty benefits.
- Form 10F: An additional self-declaration required by Indian tax law when the foreign TRC doesn't contain all the prescribed particulars (PAN or Tax Identification Number, nationality/status, period of residence, address). Form 10F is filed electronically on the Indian income-tax portal.
- PAN: Generally required to claim a beneficial treaty rate on Indian-source income; without it, payers may be required to withhold tax at higher domestic rates rather than the treaty-capped rate.
Common Scenario: NRI With US and Indian Income#
An NRI who is tax-resident in India but earns dividend income from US-listed shares will typically see US withholding tax deducted at source (often reduced from the standard 30% to the treaty rate of 15%, once the broker has the right documentation on file). India then taxes the same dividend income again as per Indian slab rates, but allows a Foreign Tax Credit (FTC) for the US tax already withheld, claimed via Form 67, filed before the ITR due date.
Key Takeaways#
- The DTAA decides who taxes what first — it doesn't make foreign income tax-free in India.
- Dividends, interest, and royalties have treaty-capped withholding rates, generally 15%, subject to conditions.
- Business profits are taxable in the other country only if there's a Permanent Establishment there.
- Claiming treaty benefits requires a TRC and, usually, Form 10F — this isn't automatic.
- Foreign tax credit for US tax paid is claimed in India via Form 67, filed before the ITR deadline.