Cross-Border Dividend Taxation: India vs. United States for Investors

(INDIA/UNITED STATES) Tax authorities in both countries are placing close attention on cross-border dividend income this year, and investors with ties to India and the United States are being reminded that the same rupee or dollar of dividend can be taxed in both places unless the U.S.–India tax treaty is applied correctly. Dividend taxation rules differ by jurisdiction, but the treaty generally caps tax in the source country at 15% and lets the country of residence give credit for tax already paid, reducing the risk of double taxation for shareholders living across borders.

How each country taxes dividends

United States

• U.S. tax residents (citizens, Green Card holders, and visa holders who meet the Substantial Presence Test) are taxed on worldwide income, so all dividends — whether from U.S. corporations or Indian companies — must be reported.
• Qualified dividends (usually from U.S. corporations or certain treaty-country entities) are taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on total income.
• Ordinary (non‑qualified) dividends are taxed at regular income tax rates, which can reach 37% at the top bracket.
• Many investors mistakenly assume the favorable qualified dividend rate applies to all foreign dividends; this can lead to underpayment and penalties when the dividend does not meet the qualified criteria (VisaVerge.com analysis).

India

• In 2020 India abolished the Dividend Distribution Tax at the company level and shifted the tax burden to shareholders.
• Resident Indians pay tax on dividends at their own slab rate. Companies withhold 10% at source if they pay more than ₹5,000 in dividends to a shareholder in a year.
• Non-Resident Indians (NRIs) face a statutory 20% withholding under Section 115A (plus surcharge and cess), although the U.S.–India treaty typically trims that rate to 15% for U.S. residents.
• Foreign dividends received by Indian residents are taxed at the resident’s slab rate; a foreign tax credit is allowed where a treaty covers the income.

The treaty safety valve: U.S.–India tax treaty mechanics

• The treaty allows the source country to tax dividends (usually up to 15%), while the country of residence taxes worldwide income but gives a credit for tax already paid abroad.
• Without the treaty, a U.S. resident with Indian shares could face 20% Indian withholding and full U.S. tax on the same income.
• With proper treaty application, the source withholding is reduced and the U.S. Foreign Tax Credit can offset U.S. liability dollar-for-dollar, subject to limits based on foreign-source income allocation.

“The source country can impose a limited tax, but to benefit from the credit in the residence country, filers must document the tax paid and show that the dividend qualifies for treaty treatment.” — Rohit Desai, New York-based CPA

Reporting and forms — what drives relief to appear on a return

Tax professionals emphasize that paperwork determines whether credit relief appears on returns.

• In the United States:
  • Report dividends on Form 1040; use Schedule B if totals exceed thresholds.
  • Use Form 1116 to claim the Foreign Tax Credit for foreign tax withheld.
  • File Form 8938 under FATCA if foreign financial assets exceed set amounts.
  • File the FBAR (FinCEN 114) if foreign accounts exceed $10,000 at any time in the year.
  • Official guidance and forms: Form 1116, Schedule B (Form 1040), Form 8938, FBAR.
• In India:
  • Declare dividends as “Income from Other Sources.”
  • List foreign assets in Schedule FA of the Indian income-tax return when required.
  • Claim treaty relief and foreign tax credit where permitted, using accurate documentation (e.g., Tax Residency Certificate when requested).

Important: These forms are not optional when thresholds are met. Skipping them can shut off credits and remove the primary shield against double taxation.

Practical compliance for cross-border households

Compliance burdens increase for families with ties to both countries. Common scenarios:
– A household on H‑1B or L‑1 in the U.S. may hold Indian equities and U.S. funds simultaneously, receiving dividends from both jurisdictions.
– Investors face two filing cycles (U.S. calendar year and Indian financial year), different exchange-rate rules, and distinct categories for income reporting.
– For Indian residents receiving U.S. dividends, tax is at Indian slab rates, and treaty-based foreign tax credit may be available — mirroring the U.S. Foreign Tax Credit mechanism.

Example: Amit’s cross-border dividends (FY 2024–25)

• Amit is an H‑1B visa holder in the U.S. with ₹10 lakh in Indian bank and company shares.
• He receives ₹100,000 in Indian dividends and $2,000 in U.S. dividends.
• India withholds 15% under the treaty.
• The U.S. taxes his worldwide income, so both Indian and U.S. dividends appear on his U.S. return.
• Amit can claim the U.S. Foreign Tax Credit for the Indian tax withheld, preventing the same ₹100,000 from being taxed twice (within U.S. credit limits).
• If Amit returns to India mid-year, split-year residency rules change which dividends are taxable in India; the treaty again determines credit availability.

Common taxpayer mistakes and pitfalls

• Assuming Indian dividends are lightly taxed because companies used to pay Dividend Distribution Tax — that system ended. Dividends are now 100% taxable for individuals; withholding is a prepayment, not the final tax.
• Trying to use the Foreign Earned Income Exclusion on dividends — not allowed; dividends are passive income.
• Failing to report foreign dividends in the U.S., which can trigger FATCA or FBAR penalties starting at $10,000 and increasing for willful non‑filing.
• Not converting foreign currency at prescribed rates, causing mismatches or audit notices in India.
• Misclassifying a dividend as qualified without meeting the U.S. tests — foreign payers often fail the requirements, shifting income into ordinary rates.

Documentation matters

• Treaty relief depends on proper documentation, often including a valid Tax Residency Certificate and broker statements or Indian Form 16A showing tax deducted.
• Credit relief is granted based on documented tax paid, not just assertions.

“Dividends are passive income, but the compliance is anything but passive.” — Rohit Desai

Policy and broader impact

• As low-cost trading apps and global ETFs grow, dividend taxation affects a broader segment of the middle class.
• VisaVerge.com suggests that streamlining credit claims and better procedural alignment under the treaty would reduce paperwork and support investment flows between India and the U.S.
• Governments will need technology-driven coordination to prevent confusion and make routine cross-border dividend income easier to process.

Practical checklist for cross-border dividend filers

1. Report all dividends on your U.S. return (Form 1040), using Schedule B if required.
2. Use Form 1116 to claim foreign taxes paid when applicable: https://www.irs.gov/forms-pubs/about-form-1116
3. File Form 8938 when foreign assets exceed thresholds: https://www.irs.gov/forms-pubs/about-form-8938
4. E-file the FBAR (FinCEN 114) if accounts exceeded $10,000: https://www.fincen.gov/report-foreign-bank-and-financial-accounts-fbar
5. Keep copies of Indian Form 16A or broker statements documenting tax withheld.
6. On the Indian return, list foreign holdings in Schedule FA and claim treaty relief/foreign tax credits where allowed.
7. Obtain and maintain a Tax Residency Certificate if treaty relief requires it.
8. Verify whether foreign dividends qualify as qualified dividends under U.S. rules before assuming lower tax rates.

Bottom line

• Dividend income from shares and funds can be taxed in both countries, but the U.S.–India tax treaty provides a path to avoid true double taxation when investors follow the rules.
• The key tools are: the source-country rate cap (usually 15%) and the Foreign Tax Credit on the residence-country return.
• The cost of ignoring forms and documentation can be steep; the reward for accurate reporting is straightforward: peace of mind that the same income was not taxed more than once.