US-India Tax Treaty: Implications for Avoiding Double Taxation

(UNITED STATES OR INDIA) The tax treaty between the United States and India sets out clear rules to help people and companies avoid paying tax twice on the same income. At its core, the treaty assigns which country can tax different kinds of income and then provides relief through tax credits or exemptions so that the income isn’t taxed twice.

It applies to residents of either country who earn across borders, and it covers salary, dividends, interest, royalties, capital gains, pensions, and fees for technical services. For people moving between the two countries for work, study, or family, and for cross‑border businesses, the treaty can lower overall tax costs and bring more certainty to planning. According to analysis by VisaVerge.com, the US‑India framework is one of the most used agreements for globally mobile professionals, Indian diaspora families, and US multinationals with Indian operations because it spells out taxing rights and supports credits that prevent double taxation.

Why the treaty matters

The treaty matters most when the same dollar of income is taxed in both places. For example, an Indian resident earning dividends from a US company could face withholding tax in the United States and then full tax again in India. The treaty:

• Caps the US withholding and
• Allows India to grant a credit for the US tax paid, up to local limits.

The same logic works in reverse for a US resident earning Indian interest or royalties: India may withhold tax at a capped treaty rate, and the United States then allows a credit against US tax so that the combined result is fair and does not punish cross‑border activity.

Residence: who can use the treaty

To get any benefit, a person must be a resident of at least one of the two countries under the treaty’s rules. Residence is not just about where you sleep; it considers:

• Where you have a permanent home
• Where your family and vital ties are
• Where you are taxed as a resident under local law

In tricky cases where both countries claim you as a resident, the treaty’s “tie‑breaker” tests apply one by one to settle primary residence. Only after residence is settled can you apply the treaty articles on specific income types and then claim relief.

How taxing rights are assigned

The treaty assigns taxing rights by income category. Key points:

• Employment income: Generally taxed where the work is performed. Short‑stay exceptions may allow the home country to retain primary taxing rights.
• Dividends, interest, royalties: Usually subject to capped withholding rates, often lower than domestic rates, reducing upfront cash‑flow pressure.
• Capital gains: Broadly taxed in the country of residence, but gains from immovable property (real estate) are taxable where the property is located. Exceptions exist for business assets and permanent establishments.
• Pensions and retirement benefits: Complex—source country may tax certain payouts while residence country may include them; relief is available but requires careful review.

Relief mechanisms: credit and exemption

Relief falls into two primary buckets:

1. Credit method
   • If you pay tax in one country, you can claim that tax as a credit against the tax you owe in the other country, up to limits.
   • This is the main way double taxation is prevented for cross‑border wages, interest, dividends, and royalties.
2. Exemption method
   • In some cases, income taxed in one country is exempt in the other.

The treaty explains which method applies to each income type and how to calculate relief when both countries assert a tax claim.

The US “saving clause” and practical impact

A central feature on the American side is the saving clause, which allows the United States 🇺🇸 to tax its citizens and residents as if the treaty did not exist, except for certain limited benefits. Practical implications:

• A US citizen in Mumbai may still need to report worldwide income to the IRS and then use credits to offset Indian taxes.
• The saving clause can limit treaty results for US citizens living in India, especially for pensions and passive income.
• The approach is often more complex for US citizens than for non‑citizens.

Compliance in India

Indian residents must report foreign income and claim relief in the Indian income tax return. Important points:

• Use Form 67 to support a foreign tax credit claim; it is filed online.
• Keep proof of US tax withheld or paid (withholding certificates, receipts).
• Late filing or incomplete information can delay credits or trigger mismatch notices.

Treaty mechanics and taxing rights (detailed)

The treaty’s design follows a simple logic: reduce friction for cross‑border life while respecting each country’s right to tax income tied to its territory. Across main income groups:

• Salaries and wages
  • Country where you perform the work has the first right to tax.
  • Short assignments may be excepted; longer or repeated workdays shift primary tax rights to the work country.
  • Relief in the home country is typically through a foreign tax credit (FTC).
• Dividends, interest, royalties
  • Source country can tax via withholding but at capped rates.
  • Residence country includes the income but grants a credit for tax paid abroad, subject to limits.
• Capital gains
  • Real property gains taxable where the property sits.
  • Share gains usually follow residence, with carve‑outs for property‑rich entities or business assets.
  • Plan ahead before selling cross‑border holdings.
• Pensions and retirement
  • Outcomes depend on whether the payment is from government plans, private plans, or social‑security‑type benefits.
  • Treaty recognition does not remove the need to apply domestic rules carefully.

The treaty is not a shortcut to choose the lowest tax at will. Anti‑abuse rules and substance requirements matter when claiming treaty benefits on passive income.

Compliance, forms, and real‑world effects

Relief is only as good as the paperwork behind it. Key compliance items:

• Indian residents claiming credit for US tax must:
  • Report foreign income and foreign tax in the Indian return.
  • File Form 67 online and tie foreign income to tax paid abroad.
  • Keep withholding certificates and receipts.
• US persons with Indian accounts face:
  • FBAR filing to the Financial Crimes Enforcement Network when foreign account totals cross a threshold: Report of Foreign Bank and Financial Accounts (FBAR)
  • FATCA reporting for specified foreign assets on US returns: Foreign Account Tax Compliance Act (FATCA)

These disclosures do not replace claiming a foreign tax credit, but they carry separate legal requirements and penalties.

For US‑India treaty specifics and IRS materials, see the IRS treaty page: IRS Tax Treaties. For Form 67 instructions and filing in India, see: Form 67 – Foreign Tax Credit.

Everyday examples

These outcomes translate into typical scenarios:

• Indian engineer on a US assignment: Wages taxed in the US; India may grant a credit so the engineer isn’t taxed twice.
• US resident with Indian bank interest: India withholds at the treaty rate; the US allows a foreign tax credit subject to limitations.
• Retiree in India getting US pension: Income often reported in both places and credits used to prevent double taxation.
• Startup founder with Indian shares living in California: Treaty determines where the gain is taxed—residence vs. property‑rich entity rules decide, with credits where appropriate.

For businesses:
– Treaty reduces excess withholding on cross‑border service fees and royalties.
– Clarifies when a permanent establishment exists, affecting corporate profit taxation.

Practical tips and compliance checklist

• Keep records of foreign taxes paid: withholding statements and final assessments.
• Match income reported in both countries to support credit claims.
• File required support forms on time:
  • India: Form 67 for foreign tax credit.
  • US persons: FBAR and FATCA filings as applicable.
• Review the treaty article relevant to your income type—especially before capital gains or business transactions.
• Remember the saving clause if you are a US citizen or resident living in India; you will likely still file a US return and rely on credits.

Important: Missing a deadline or filing the wrong forms can block a credit even if the legal right exists. Documentation and timing are critical.

Who benefits and why planning matters

The treaty’s practical reach is wide: NRIs returning to India with US investments, US green card holders spending long periods in India while holding US retirement accounts, and families with assets and wages across the two countries. The treaty provides a pathway to fair tax results, but compliance steps can be heavy.

VisaVerge.com reports that taxpayers who plan early—confirming residence status, mapping income to treaty articles, and building a clean paper trail—face fewer surprises and are more likely to get credits allowed the first time.

Final notes and resources

Government portals and official guidance remain the best sources for the fine print. The IRS and India’s Income Tax Department provide treaty materials, foreign tax credit guidance, and instructions for FBAR/FATCA/Form 67. These resources are essential reading for cross‑border families and businesses.

For a smooth outcome:
– Be thorough in reporting worldwide income and foreign tax paid.
– Align return details between jurisdictions.
– Use the treaty to prevent double taxation, but expect to manage documentation, deadlines, and domestic rules carefully.

When both sides are done correctly, the tax treaty works as promised—preventing double taxation while keeping cross‑border life possible for people and businesses operating in the US‑India lanes each day.