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DTAA Benefits (India-US)
How the Double Taxation Avoidance Agreement between India and the US prevents you from paying tax twice on the same income.
India and the United States have a Double Taxation Avoidance Agreement (DTAA) — a bilateral tax treaty that determines which country has the right to tax specific income and provides mechanisms to avoid being taxed twice. For NRIs and Indian-Americans, the India-US DTAA signed in 1989 is one of the most important documents in their financial lives.
What DTAA Covers
The treaty covers most types of income earned by residents of one country from the other.
- Employment income: Salary earned in the US while living there is typically only taxed in the US
- Dividends: Covered under Article 10 — maximum withholding rates specified
- Interest income: Article 11 — sets limits on withholding tax
- Capital gains: Article 13 — generally taxed in country of residence
- Business income: Article 7 — typically only taxed where business operations occur
Foreign Tax Credit: The Main Relief Mechanism
Even where both countries have taxing rights, the Foreign Tax Credit prevents actual double taxation.
- US tax: Calculated on worldwide income first
- Foreign Tax Credit (Form 1116): Dollar-for-dollar credit for taxes paid to India
- Example: $1,000 dividend income; India withholds $200 TDS; US tax would be $220; net US tax = $20
- Excess foreign tax credits can be carried back 1 year or forward 10 years
- Limitation: FTC cannot reduce US tax below zero; cannot shelter US income from US tax
Claiming DTAA Benefits in India
NRIs can claim reduced TDS rates on Indian income by submitting a Tax Residency Certificate (TRC) to Indian payers.
- Obtain TRC from IRS (Form 6166) — proves you are a US tax resident
- Submit TRC + Form 10F to Indian bank/fund house before each financial year
- Example benefit: India-US DTAA Article 11 limits interest withholding to 15% vs standard 30% TDS
- Dividend withholding: Standard 20% TDS may be reduced to 15% for US residents under DTAA
- File ITR in India even if no tax due — required if TDS was deducted on Indian income
Key Takeaways
- ✓The India-US DTAA prevents most instances of double taxation through the Foreign Tax Credit
- ✓File Form 6166 with the IRS each year to get a Tax Residency Certificate for claiming DTAA benefits in India
- ✓Submit TRC + Form 10F to Indian banks and fund houses to get reduced withholding tax rates
- ✓Most capital gains are taxed only in your country of residence under the DTAA
- ✓Keep detailed records of all cross-border income and taxes paid — needed for both country filings
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