How to claim India-US tax treaty relief and avoid double taxation

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The India-US Double Taxation Avoidance Agreement (DTAA) lets taxpayers credit tax paid in one country against liability in the other, so the same income is not taxed twice. It covers salary, business profits, dividends, interest, royalties, capital gains, and pension income, with specific articles defining which state has primary taxing rights. NRIs, returning Indians, and residents with US-sourced income — whether from RSUs, rental property, or portfolio investments — must understand treaty tie-breaker rules, the foreign tax credit mechanism under Section 90 of the Income-tax Act, 1961, and the documentation the Indian tax department expects when filing Form 67 and the return of income.

This guide walks through the practical steps: determining residency under the treaty tie-breaker, identifying the correct article for each income type, calculating the allowable foreign tax credit, and assembling the paperwork the assessing officer will ask for. It also flags common mistakes such as claiming credit for US state taxes, missing the Form 67 filing deadline, or applying the wrong withholding rate on dividends. References to the Income Tax Department portal and RBI circulars are included so you can verify the current position before you file.

Residency and the tie-breaker test

Rohan: Veda, I spent 200 days in the US and 165 days in India last financial year. Both countries think I’m a tax resident. Now what?

Veda: Classic tie-breaker. The treaty’s Article 4 runs a four-step test: permanent home, centre of vital interests, habitual abode, and nationality. You apply them in order and stop at the first one that gives a clear answer.

Rohan: I own a flat in Bangalore and rent in Seattle. Permanent home goes to India?

Veda: Only if the Bangalore flat is “permanently available” — not let out, not a holiday home. If your family lives there and you return every summer, India wins. If it’s rented out, you move to step two: centre of vital interests. Where are your bank accounts, club memberships, kids’ schools, doctor?

Rohan: Kids are in Bangalore, but my 401(k) and brokerage are in the US.

Veda: Then it’s a genuine split. Step three: habitual abode. Count days over a longer period — usually three years. If India still edges it, you’re treaty-resident in India. If not, step four: nationality. Indian passport? India wins. Document the whole chain in a one-pager for your CA; the assessing officer loves a clear narrative.

Mapping income to the right treaty article

Rohan: My RSUs vested while I was in the US. The company withheld 22% federal plus California tax. Which article covers this?

Veda: Article 15 (Dependent Personal Services) for salary, but RSUs are tricky. The gain at vest is salary; subsequent gain is capital gains under Article 13. India taxes the full vest value as perquisite under Section 17(2). You claim foreign tax credit only for the US tax on the vest portion — not the state tax, not the later capital gain.

Rohan: What about the dividend from my US ETFs? 15% was withheld.

Veda: Article 10 caps dividend withholding at 15% for beneficial owners. You report the gross dividend in India, claim 15% as foreign tax credit. If the broker withheld 30% because you didn’t submit Form W-8BEN, you must reclaim the excess from the IRS — India won’t credit more than the treaty rate.

Rohan: And the rental income from my Chicago condo?

Veda: Article 6 (Immovable Property). The US has primary taxing right. You file a US 1040-NR, pay US tax on net rental income, then claim that tax as credit in India against the Indian tax on the same net income. Keep the US return, Schedule E, and payment receipts.

Calculating the foreign tax credit

Rohan: So I just add up all US taxes paid and deduct from my Indian tax bill?

Veda: Not that simple. Rule 128 and Section 90 limit the credit to the lower of: (a) foreign tax actually paid on that income, and (b) Indian tax payable on that same income computed at Indian rates. You calculate per income head — salary, house property, capital gains, other sources — not as one big bucket.

Rohan: What about the US standard deduction I claimed on the 1040-NR?

Veda: Irrelevant. Indian credit is based on the tax actually paid on the gross income as defined by the treaty. If the US tax is lower because of their deductions, your credit is lower. You don’t get to top it up to the Indian liability.

Rohan: And the cess and surcharge on my Indian tax?

Veda: Credit applies only to basic income tax. Health and education cess, surcharge — those stay payable in full. Many people forget this and end up with a demand notice.

Documentation checklist

• Tax residency certificate (TRC) from the IRS — Form 6166 — for the relevant US tax year
• Copy of US tax return filed (1040, 1040-NR, or 1040-SR) with all schedules
• Proof of tax payment: IRS transcripts, bank debit advice, or employer W-2/1099 showing withholding
• Form 67 filed on the Income Tax portal before the due date of the Indian return (usually 31 July for non-audit cases)
• Tie-breaker residency analysis note (one page) if dual residency is possible
• Article-wise mapping of each income stream with treaty article numbers
• Currency conversion rate: RBI reference rate on the last day of the month preceding the month of payment

Common pitfalls

Rohan: My CA filed Form 67 after the return. The portal accepted it. Am I safe?

Veda: The portal accepts late Form 67, but the law says it must be filed on or before the due date of the return. Late filing = no foreign tax credit. You’ll get a notice under Section 143(1) disallowing the credit. File Form 67 first, then the return.

Rohan: I claimed credit for California state tax. The notice disallowed it.

Veda: Treaty covers federal tax only. State taxes are not creditable under Article 25. Same for US Social Security and Medicare taxes on salary — they’re not “income tax” under the treaty definition.

Rohan: I converted USD to INR at the rate on the day I received the money.

Veda: Rule 126 mandates the RBI reference rate on the last day of the month preceding the month of receipt. Using the spot rate on receipt day is a common error that triggers a query.

FAQs

Do I need a US tax residency certificate every year?

Yes. The Indian tax department requires a valid TRC (Form 6166) for each financial year you claim treaty benefits. Apply to the IRS early — processing can take 6-8 weeks.

Can I claim credit for US tax paid on capital gains from US-listed shares?

Yes, under Article 13. India taxes long-term capital gains on listed shares at 12.5% (above ₹1.25 lakh) without indexation. You claim credit for the US tax paid (0%, 15%, or 20% depending on holding period and income), limited to the Indian tax on that gain.

What if the US tax year (calendar) and Indian tax year (April-March) don’t align?

You claim credit for US tax paid during the Indian financial year, regardless of which US tax year it belongs to. Maintain a schedule mapping each US payment to the Indian FY. The assessing officer will ask for this reconciliation.

Disclaimer: This article is for general educational purposes only and does not constitute tax, legal, or financial advice. Tax treaty application depends on individual facts, residency status, and current law. Consult a qualified Chartered Accountant or tax adviser before filing. Verify the latest rates, forms, and procedures on the Income Tax Department portal and RBI website.