India–U.S. DTAA: A Comprehensive Guide with Case Studies and Credits

The India–U.S. Double Taxation Avoidance Agreement has moved from a dense treaty to a daily safety net for people whose lives cross borders, as students, H‑1B professionals, L‑1 managers, freelancers, and investors weigh how their incomes are taxed on both sides. Signed on 18 December 1990 and effective for the 1991–92 assessment year, the pact sets clear rules on who taxes what, and in many cases caps the rate at the source.

For Indians in the United States 🇺🇸 and Americans earning in India 🇮🇳, it often means the difference between a manageable tax bill and the fear of paying twice on the same income. It has become a practical shield—commonly called the DTAA—and covers income tax on salaries, dividends, interest, royalties, technical fees, and capital gains.

Core principle: the credit method and information sharing

At the treaty’s heart is a simple idea: only one country should have the first claim on a specific stream of income, and if both touch it, the resident country should grant a credit for taxes already paid abroad.

• The credit method is set out in Article 25 and is the daily tool that lets taxpayers settle returns without double hits.
• Officials on both sides share information under Article 26, aiding enforcement and preventing avoidance.

The most visible taxpayer benefit is the foreign tax credit that cancels duplicate charges and reduces confusion for families who split work and studies between the two countries.

Key articles and caps that affect everyday taxpayers

• Article 15 — Salaries: taxed where the work is performed, anchoring pay to job location.
• Article 10 — Dividends: tax at source capped at 15%.
• Article 11 — Interest: source taxation limited to 10–15%.
• Article 12 — Royalties and fees for technical services: also generally 10–15%.
• Article 20 — Students and trainees: temporary relief, including exemption for scholarship income for a limited period.
• Article 5 — Permanent establishment (PE): defines when business activity creates taxable presence.
• Article 7 — Business profits: tie tax to existence of a PE.
• Article 26 — Information exchange: supports enforcement while taxpayers still claim credits.

These limits matter to:
– Indians holding U.S. stocks (dividends capped),
– Americans investing in India,
– Consultants in India billing U.S. clients,
– Researchers and trainees receiving scholarships.

Practical case studies (typical scenarios)

1. Indian H‑1B professional in California with rental income in Bangalore:
   • Pays Indian tax at source on rent, reports it on U.S. return, then claims a foreign tax credit to avoid double taxation.
   • U.S. salary is taxed in the United States.
2. Mumbai‑based freelance software consultant serving U.S. clients:
   • May see 10–15% withholding under Article 12 as royalties/fees for technical services.
   • Pays balance in India after claiming credit for U.S. withholding.
3. U.S. resident holding Indian shares:
   • Indian withholding on dividends (capped by Article 10), then claims U.S. credit so the dividend is taxed effectively once.

How the credit method works in practice

• You typically pay tax in the source country first.
• Your resident country then gives a credit against its tax for the amount already paid abroad.
• The credit does not create refunds beyond your resident-country tax liability; it prevents paying the same dollar twice.

This mechanism is essential for the hundreds of thousands of people moving through F‑1/OPT, H‑1B, or L‑1 statuses each year who end up with rent in one jurisdiction and salary in another.

Residency rules and the tie‑breaker sequence

Residency rules often decide the broader tax picture and are a common source of confusion:

• India: resident if you meet the 182‑day test (or 60 days plus 365 days in the prior four years).
• United States: uses the substantial presence test with a 183‑day formula.

If someone qualifies as a resident in both countries, the DTAA tie‑breaker determines residency in this order:
1. Permanent home
2. Center of vital interests
3. Habitual abode
4. Citizenship
5. Mutual agreement between tax authorities

For families with children in one country and jobs in another, this tie‑breaker can be decisive for filing complexity and tax outcome.

Documentation and forms — paperwork that matters

To claim treaty benefits, taxpayers must show residency and proof of taxes paid:

• U.S. residency certificate: IRS Form 6166 — see the IRS page: Form 6166
• India TRCs and related forms:
  • Form 10FA guidance: Form 10FA
  • Form 10FB guidance: Form 10FB
  • Form 10F details: Form 10F

Typical supporting documents:
– U.S.: W‑2s, Form 1040, Form 6166 (if applicable)
– India: Form 16, Form 26AS, Form 10F/10FA/10FB, PAN

Important warning:

Without proper TRCs and supporting documents, lower DTAA rates or foreign tax credits can be denied.

Common mistakes and costly missteps

• Failing to obtain a TRC every year.
• Reporting the same income in both countries but forgetting to claim the credit.
• Misunderstanding treatment of U.S. 401(k) or Indian provident fund withdrawals.
• Not disclosing foreign assets on India’s Schedule FA, which can cause downstream compliance problems.
• Assuming FATCA and DTAA are the same.

DTAA vs FATCA — clearing the confusion

• DTAA: a bilateral treaty that avoids double taxation by capping source rates and providing credits.
• FATCA: a U.S. law requiring foreign financial institutions to report U.S. taxpayer accounts.

Key point:

FATCA is about disclosure and data flows; DTAA is about how tax is allocated and credited. Reporting under FATCA does not change your tax bill by itself.

Practical limits and takeaways

• Dividends: capped at 15% (Article 10).
• Interest/royalties/technical fees: 10–15% (Articles 11 and 12).
• Salary: taxed where services are performed (Article 15) — remote work and travel days matter.
• Business profits: taxed only if there is a permanent establishment.

Tax professionals emphasize:
– The goal is fair tax, not zero tax.
– The credit method generally results in paying the higher of the two country rates, not both summed.
– Clean documentation (TRC, Form 10F, Form 6166, PAN, consistent filings) helps taxpayers obtain treaty results smoothly.
– Those who skip forms or delay proofs often face higher withholding or lose credits they could have claimed.

Final perspective

The treaty’s staying power lies in balance. It recognizes large cross‑border flows of talent and capital between the United States and India and sets a workable order of taxation.

• It prevents double taxation, clarifies residency questions, and reduces friction for families and professionals split across the two systems.
• In a world where careers and education increasingly span both countries, these rules continue to anchor a complex reality and keep people from paying the same bill twice.