NRIs and Bilateral Agreements: DTAA Benefits and Social Security

(UNITED STATES (U.S.)) Indian expatriates and students are pressing into 2025 with mixed news on cross‑border tax rules: the India–U.S. Income Tax Treaty continues to offer relief from double taxation, including a rare standard deduction for certain students, while the long‑sought social security “totalisation” agreement remains out of reach, leaving many workers exposed to duplicate payroll contributions.

For a Non‑Resident Indian (NRI) living in the United States 🇺🇸, the difference between these two tracks is felt every pay cycle and every filing season. The stakes are clearer as more Indian professionals and students settle into roles and classrooms across the country.

The Income Tax Treaty (DTAA): what it does and why it matters

At the center is the bilateral Income Tax Treaty, also known as the Double Taxation Avoidance Agreement (DTAA), first signed in 1989 and updated by later protocols. The treaty:

• Reduces the risk of the same income being taxed twice by India and the U.S.
• Trims withholding on passive income (dividends, interest, royalties) when treaty conditions are met
• Clarifies which country can tax certain income streams, including tie‑breaker rules for residency conflicts

According to analysis by VisaVerge.com, the treaty has become a planning anchor for NRIs who split income or time across borders, especially those who hold assets in India while working in the U.S. The practical benefits show up as smaller tax bites on dividends and interest and clearer definitions that help avoid mismatches between systems.

Student benefit: Article 21(2) and the standard deduction

One standout feature is Article 21(2). Unlike most nonresident aliens in the U.S., Indian citizens on F‑1 or J‑1 status who are nonresident for tax purposes can claim the U.S. standard deduction.

• This allowance reduces taxable income up to the single standard deduction level for the tax year.
• It can save hundreds or thousands of dollars, especially for students working campus jobs or paid internships.
• The treaty does not change immigration status; it changes only how income is taxed.

University accountants report this can be a make‑or‑break difference on many students’ returns.

Passive income and withholding: dividends, interest, royalties

Passive income rules are important for Indians holding U.S. securities:

• Withholding on dividends paid to Indian residents can fall from the default 30% to treaty rates, often 15%, when eligibility is established.
• The treaty also covers interest and royalties.
• Access to lower rates depends on tax residence and correct paperwork.

Common practical steps:

1. File the IRS form that notifies a payer you’re claiming a treaty benefit.
2. Non‑U.S. individuals commonly use Form W‑8BEN (available on the IRS website).

Relevant links (preserved exactly as provided):
– Tax Treaties
– Form W-8BEN

Tax Residency Certificate (TRC): claiming treaty relief in India

The obligation to show correct residence status runs both ways.

• NRIs who are U.S. tax residents but earn income in India (rent, interest, dividends) often need a Tax Residency Certificate (TRC) from U.S. authorities to claim relief in India under the treaty.
• Without a TRC, Indian withholding agents may not grant treaty rates, causing higher upfront withholding and later refund processes.
• Practitioners say the TRC is the hinge for smooth treaty claims on the Indian side, especially for those clearly resident in the U.S. but still holding assets or receiving India‑sourced income.

Payroll taxes and the missing totalisation agreement

The treaty’s protections do not resolve payroll tax conflicts. As of 2025, there is no U.S.–India totalisation agreement in force.

• Many Indian professionals in the U.S. pay into U.S. Social Security and Medicare, even if they also contribute to Indian plans like EPFO or PPF.
• Without a totalisation pact, there is no bilateral mechanism to prevent double contributions during temporary assignments.
• India has social security agreements with other countries (for example, Germany) that allow portability and prevent dual contributions. The absence of a U.S. deal keeps costs higher for Indian assignees.

This gap matters especially for H‑1B and L‑1 professionals:

• Many quickly become U.S. tax residents under the substantial presence test and are taxed like residents on worldwide income.
• The treaty can still guide source rules and tie‑breakers when a residency conflict exists, but student benefits and some nonresident worker provisions no longer apply.
• The lack of totalisation is a core ask from Indian professionals on short assignments.

Important: Until a social security agreement is signed, companies and employees must budget for higher payroll contributions, since workers may pay into a system they won’t vest in if they return to India before meeting U.S. benefit thresholds.

Filing pitfalls and compliance requirements

Indian students and trainees can gain from the student standard deduction, but only if they claim it properly.

Common issues and fixes:

• Some students miss the benefit because they use generic nonresident tax software or advice aimed at non‑treaty countries.
• For Indian nationals in F‑1 or J‑1 status who are nonresident aliens:
  • Point to Article 21(2) on the return.
  • Enter the standard deduction allowed for the year on the federal return.
  • If receiving U.S.‑source portfolio income, present Form W‑8BEN to the broker or payer to secure reduced withholding.

Tax professionals warn incomplete or incorrect treaty claims can trigger:

• Penalties
• Delayed refunds
• Denials of treaty benefits

This caution also applies to cross‑border remote work:

• If an NRI performs services from India for a U.S. employer, source rules and permanent establishment concepts under the treaty may affect which country taxes the income.
• Split months, freelancing, or clients in both markets can create filing obligations in both countries, even if treaty credits ultimately avoid double taxation.

Residency rules in India and their impact

The rules around residency in India shape how the treaty applies at home.

• Indian thresholds (days present and income levels) determine whether a person is an NRI, Resident but Not Ordinarily Resident (RNOR), or Resident.
• These categories influence who is taxed on global income in India and who can claim treaty relief.
• An NRI with Indian income above certain levels may face tighter day‑count limits, affecting filing obligations.

For many families, the interplay between Indian residency rules and U.S. tax residence defines which country taxes first and which provides credits.

Practical checklist for NRIs and advisers

Experts emphasize that “treaty benefit” does not mean “automatic benefit.” Key compliance items include:

• Obtain and retain the Tax Residency Certificate (TRC) when Indian filings require it.
• Complete and present Form W‑8BEN to claim lower U.S. withholding where eligible.
• Cite the specific treaty article relied upon in filings.
• Keep clear records that match the articles and claims made.

Bottom line and planning advice

The policy picture may evolve, but for now the news is split:

• The DTAA continues to ease income tax burdens for the Indian community in the U.S., notably via rate cuts and the student standard deduction.
• The absence of a U.S.–India totalisation agreement means duplicate social security contributions remain a real cost for many Indian workers on temporary assignments.

Practical advice for NRIs:

1. Use the treaty where it applies.
2. Collect the TRC when Indian filings require it.
3. Present Form W‑8BEN to claim reduced U.S. withholding when eligible.
4. Keep detailed records that match the treaty articles cited.

In a year when cross‑border careers are increasingly common, those who follow the treaty’s steps and maintain proper documentation are most likely to avoid double taxation and keep more of what they earn.