Comprehensive Guide to India-USA DTAA and Foreign Tax Credit (FTC)

As of July 21, 2025, the Double Taxation Avoidance Agreement (DTAA) between India 🇮🇳 and the United States 🇺🇸 continues to play a vital role for people and businesses earning income across both countries. This update explains what has changed in recent procedures, who is affected, what actions are required, and what these changes mean for anyone with cross-border income. The focus is on helping readers understand the DTAA, how to claim foreign tax credits (FTC), and what steps to take to avoid double taxation.

Summary of What Changed

While the main text of the India–USA DTAA has not changed since it was signed in 1990, there have been important updates in how taxpayers must comply with the agreement. Both Indian and US tax authorities have made electronic filing of key forms mandatory, clarified documentation requirements, and increased scrutiny of cross-border income. These changes affect anyone who is a tax resident in one country and earns income in the other, including NRIs (Non-Resident Indians), US citizens living in India, and multinational companies.

Who Is Affected

• Indian residents earning income in the United States 🇺🇸 (such as capital gains, dividends, or rental income)
• US residents or citizens earning income in India 🇮🇳 (such as capital gains from Indian shares, real estate, or business income)
• NRIs, expatriates, and multinational companies with cross-border operations
• Taxpayers with foreign bank accounts or financial assets in either country

Effective Dates

• The DTAA itself remains unchanged and in force since 1990.
• Recent procedural updates, including mandatory electronic filing of forms and stricter documentation requirements, are effective for tax years 2024 and 2025.
• These changes apply to all income earned and reported for these tax years.

Required Actions

To benefit from the DTAA and avoid double taxation, taxpayers must follow specific steps based on their residency and the source of their income. Here’s what you need to do:

For Indian Residents Earning Income in the United States 🇺🇸

1. Report All Foreign Income: Include all US-sourced income (such as capital gains, dividends, or rental income) in your Indian tax return.
2. File Form 67: Before filing your Indian income tax return, you must electronically file Form 67 to claim a foreign tax credit for taxes paid in the United States.
3. Collect and Submit Documentation:
   • Proof of US tax paid (such as IRS Form 1040, Form 1099, or tax payment receipts)
   • Tax Residency Certificate (TRC) from the United States
4. Use Correct Exchange Rate: Convert US taxes paid to INR using the Reserve Bank of India’s (RBI) telegraphic transfer buying rate on the last day of the month before the tax payment.
5. Maintain Records: Keep all documents for future reference and possible audits.

For US Residents or Citizens Earning Income in India 🇮🇳

1. Report Indian Income: Include all Indian-sourced income (such as capital gains from Indian shares or real estate) in your US tax return.
2. File Form 1116: Attach Form 1116 to your US tax return to claim a foreign tax credit for taxes paid in India.
3. Provide Documentation:
   • Indian tax payment documents (such as Form 16A)
   • Tax Residency Certificate (TRC) from India
4. Report Foreign Assets: If you have Indian bank accounts or financial assets, report them using Form 8938 and FBAR as required.
5. Keep Records: Save all documents for at least seven years in case of IRS review.

Implications for Pending Applications

If you have already filed your tax return for 2024 or 2025 but did not submit the required forms (Form 67 for India, Form 1116 for the US), your foreign tax credit claim may be denied. You may need to file a revised return or an amended return with the correct forms and documents. Delays or mistakes can result in double taxation, penalties, or audits.

Understanding DTAA and Double Taxation

The DTAA is a treaty that prevents you from being taxed twice on the same income—once in the country where you earn the income (source country) and again in the country where you live (resident country). The India–USA DTAA uses the tax credit method. This means:

• The country where you live gives you a credit for taxes you already paid in the country where you earned the income.
• You pay tax at the higher of the two countries’ rates, but not both in full.

Example for Indian Residents:
– You sell US stocks and make a $10,000 long-term capital gain (LTCG).
– You pay $1,500 tax in the United States (15%).
– India taxes the same gain at 20% (about ₹1.66 lakh).
– India gives you credit for the $1,500 US tax (converted to INR), so you only pay the difference in India.

Example for US Residents:
– You earn ₹5 lakh LTCG from Indian shares.
– You pay ₹62,500 tax in India (12.5%).
– The US taxes the same gain at 15% (₹75,000).
– The US gives you credit for the ₹62,500 Indian tax, so you only pay the difference in the US.

Key Legal Provisions

• India: Section 90 and 90A of the Income Tax Act, 1961, apply when there is a DTAA (like with the United States). Section 91 applies if there is no DTAA.
• United States: Internal Revenue Code (IRC) Section 901 allows a foreign tax credit. Section 904 limits the credit to the US tax due on the foreign income.

Required Forms and Where to Find Them

• Form 67 (India): Form 67 official link
• Form 1116 (US): Form 1116 official link
• Form 8938 (US): Form 8938 official link
• FBAR (US): FBAR official link

Special Cases and Practical Tips

• Capital Gains on Indian Shares: India usually keeps the right to tax capital gains on Indian securities. US residents must claim a foreign tax credit in the US for Indian taxes paid.
• Real Estate Income in India: India taxes capital gains at 20% with indexation. The US taxes at 15% or 20%, depending on your income. Claim a credit in your US return for Indian tax paid.
• Standard Deduction: You can claim a foreign tax credit even if you take the standard deduction in India.
• Exchange Rate: Always use the RBI’s published rate for converting foreign taxes to INR.

Common Mistakes to Avoid

• Not Filing Required Forms: If you don’t file Form 67 (India) or Form 1116 (US), your foreign tax credit will be denied.
• Missing Proof of Foreign Tax Paid: Without proof (tax returns, payment receipts), tax authorities may reject your credit claim.
• Assuming Income Is Exempt: Most capital gains are taxable in both countries. Don’t assume full exemption under the DTAA.
• Wrong Exchange Rate: Use the correct rate published by RBI or IRS on the date of the transaction.

Step-by-Step Process to Claim DTAA Benefits and FTC

For Indian Residents:
1. Check if your income qualifies under the India–USA DTAA.
2. File Form 67 electronically before your income tax return.
3. Attach a US Tax Residency Certificate and proof of US tax paid.
4. Calculate your foreign tax credit as the lower of Indian tax on the foreign income or the US tax paid (converted to INR).
5. Claim the credit in your Indian tax return.
6. Keep all records for future audits.

For US Residents:
1. Check if your income qualifies under the India–USA DTAA.
2. File Form 1116 with your US tax return.
3. Attach Indian TRC and proof of Indian tax paid.
4. Calculate your foreign tax credit as the lower of US tax on the Indian income or Indian tax paid.
5. Claim the credit in your US tax return.
6. Report foreign assets using Form 8938 and FBAR if needed.
7. Keep all records for future audits.

Recent Trends and Increased Scrutiny

Both Indian and US tax authorities have increased their focus on cross-border income and foreign asset reporting. Electronic filing of forms is now mandatory, and deadlines are strictly enforced. There is also more attention on the accuracy of exchange rates used for currency conversion and the completeness of documentation.

Expert Recommendations

• Start Early: Begin collecting documents and filing forms well before the tax deadline.
• Keep Detailed Records: Save all tax returns, payment receipts, TRCs, and correspondence.
• Consult Professionals: Tax consultants and chartered accountants with cross-border experience can help you avoid mistakes.
• Use Official Resources: For the most current rules and forms, visit the Indian Income Tax Department’s DTAA page or the IRS Foreign Tax Credit page.

Implications for Pending Applications

If you have already filed your return but missed a required form or document, you should file a revised or amended return as soon as possible. Delays can lead to denial of your foreign tax credit, resulting in double taxation or penalties. If you are unsure, consult a tax professional immediately.

Looking Ahead

The India–USA DTAA remains a key tool for avoiding double taxation and supporting cross-border economic activity. While the treaty text is stable, compliance requirements are becoming stricter, and electronic filing is now the norm. Taxpayers should expect ongoing attention to transparency and proper reporting from both countries.

Key Takeaways and Next Steps

• Always file the correct forms (Form 67 for India, Form 1116 for the US) before your tax return.
• Collect and keep all proof of foreign tax paid and tax residency certificates.
• Use the correct exchange rate for currency conversion.
• Report all foreign income and assets as required.
• Consult official government resources and professional advisors for help.

As reported by VisaVerge.com, these steps are essential for anyone dealing with cross-border income between India 🇮🇳 and the United States 🇺🇸. Staying informed and compliant will help you avoid double taxation, penalties, and unnecessary stress.

For more details on the DTAA and official guidance, visit the Indian Income Tax Department’s DTAA resource page.

By following these updated procedures and keeping good records, you can make the most of the India–USA DTAA and protect your income from double taxation.

Learn Today

DTAA → A treaty preventing double taxation on income earned across India and the United States.
Foreign Tax Credit → A credit reducing tax liability for taxes already paid in another country on the same income.
Form 67 → Indian tax form required to claim foreign tax credits under DTAA for income earned abroad.
Form 1116 → US IRS form used to claim foreign tax credits for taxes paid in India.
Tax Residency Certificate → Official document certifying an individual’s tax residency status in a specific country.

This Article in a Nutshell

The India–USA DTAA helps taxpayers avoid double taxation by providing foreign tax credits. Mandatory electronic filing and stricter documentation, effective 2024-2025, increase compliance requirements. Taxpayers must file correct forms and keep proper records to claim credits and prevent penalties on cross-border income between the two countries.
— By VisaVerge.com