Claiming Benefits Under the India-USA DTAA Tax Treaty

If you are an Indian resident earning dividends from a US company, an H-1B professional with Indian rental income, or an Indian freelancer billing US clients, you are exposed to taxation in both countries on the same income. The India-USA Double Taxation Avoidance Agreement is the instrument that prevents you from paying tax twice.

This guide covers the treaty article by article, walks through the rates, and explains the exact documentation you need to claim relief. It assumes FY 2025-26 (AY 2026-27), which is governed by the Income-tax Act 1961. The Income-tax Act 2025 applies from 1 April 2026 (Tax Year 2026-27) and carries the treaty-relief provisions forward in Section 159.

What is the India-USA DTAA? The India-USA Double Taxation Avoidance Agreement is a bilateral tax treaty between the Republic of India and the United States of America, signed on 12 September 1989 together with a protocol, and in force from 18 December 1990. Its purpose is to allocate taxing rights over cross-border income, set maximum withholding rates at source, and provide a mechanism for relief (Foreign Tax Credit) so that neither country's residents pay full tax in both jurisdictions on the same income. The legal basis in India is Section 90 of the Income Tax Act, which gives treaty provisions overriding effect when they are more beneficial to the taxpayer than domestic law.

DTAA Between India and USA: Treaty History and Legal Basis

India and the USA signed the DTAA on 12 September 1989, and the treaty entered into force on 18 December 1990. A protocol and a memorandum of understanding on the scope of fees for included services were signed with it, and the treaty has not been amended by a later protocol. In India it applies to income arising in taxable years beginning on or after 1 April 1991 (Article 30).

Under Indian domestic law, Section 90 of the Income Tax Act allows the Central Government to enter into agreements with foreign countries for the avoidance of double taxation. Section 90(2) provides a critical safeguard: where the provisions of the DTAA are more beneficial to the assessee than the provisions of the Income Tax Act, the DTAA provisions prevail. This means the taxpayer always gets the lower of the treaty rate or the domestic rate.

The Income-tax Act 2025, which applies from 1 April 2026 (Tax Year 2026-27), replaces Sections 90 and 90A with Section 159. The treaty itself and its rates are unchanged; only the domestic section numbers change from Tax Year 2026-27.

DTAA Between India and USA PDF: Where to Get the Official Text

Read the DTAA agreement between India and USA from a government source, not a copy on a third-party site:

• India: the Income Tax Department publishes the treaty, its protocol and the memorandum of understanding on fees for included services in the DTAA section of incometaxindia.gov.in, from where you can open or save the PDF.
• USA: the IRS publishes the same treaty and its technical explanation on its United States income tax treaties A to Z page under "India".

When you rely on an article, quote it from the official PDF in your Form 67 working papers or any reply to a tax notice.

Article 4: Residency and Tie-Breaker Rules

A person can be a tax resident of both India and the US simultaneously under each country's domestic law. Article 4 resolves this with a tie-breaker sequence:

1. Permanent home. The individual is resident where they have a permanent home available. If they have a permanent home in both countries, move to the next test.
2. Centre of vital interests. Residence goes to the country where personal and economic relations are closer (family, main business, social ties).
3. Habitual abode. If vital interests cannot be determined, the country where the person stays more often prevails.
4. Nationality. If habitual abode is equal or indeterminate, the person is treated as a resident of the country whose nationality they hold.
5. Mutual Agreement. If none of the above resolves the question, the competent authorities of both countries settle it by mutual agreement.

For most H-1B professionals living in the US with family, the tie-breaker assigns US residency. For returning NRIs who have shifted their permanent home back to India, the tie-breaker assigns Indian residency. Getting this classification right is the first step, because it determines which country is the "residence" country (which taxes worldwide income) and which is the "source" country (which taxes only income arising within its borders).

Who Benefits from the India-USA DTAA

The treaty applies to persons who are residents of one or both contracting states. In practical terms, four groups use this treaty most frequently.

Step 1: H-1B and L-1 professionals working in the US with Indian income. These individuals are often US tax residents who continue to earn rental income, bank interest, or capital gains in India. The DTAA ensures Indian TDS on such income can be credited against their US tax liability, and vice versa.

Step 2: Indian residents with US-sourced income. Indian residents who hold US stocks and receive dividends from US companies face 30% default US withholding. The treaty reduces this to 25% for portfolio dividends, and the US tax paid is creditable in India via Form 67. Interest on US bank deposits is generally not taxable in the US for a nonresident alien (IRC Section 871(i)), so it is simply taxed in India.

Step 3: Indian freelancers and IT companies billing US clients. Services performed in India are generally not US-source income under US law, so a US client should not withhold US tax once it has Form W-8BEN or W-8BEN-E. Where Article 12 does apply, the treaty caps tax on fees for included services at 15%. Professional services of an individual freelancer are excluded from Article 12 and fall under Article 15 instead.

Step 4: Indian companies receiving royalties or dividends from US subsidiaries. Royalties for intellectual property, brand licensing, or technology transfer are capped at 15% (10% only for royalties on industrial, commercial or scientific equipment), and dividends at 15% where the Indian company holds at least 10% of the voting stock, instead of the 30% US default.

If you fall into any of these categories, you should also read our detailed NRI income tax guide for the residential status rules and the Section 195 TDS guide for withholding obligations when paying non-residents.

Treaty Withholding Rates at a Glance

The table below compares the default domestic withholding rate with the treaty rate under the India-USA DTAA.

Indian domestic rates are before surcharge and 4% cess. US bank deposit interest and portfolio interest paid to a nonresident alien are generally exempt from US tax (IRC Sections 871(h) and 871(i)), so the 30% US rate does not bite on them. To get the treaty rate on Indian income, a non-resident recipient must furnish a TRC (Section 90(4)) and Form 10F (Section 90(5), Rule 21AB); to get it on US income, an Indian resident gives the US payer Form W-8BEN.

Tax Rate Chart

Key Treaty Rates: India-USA DTAA

Maximum withholding at source under the treaty

Dividends (portfolio/individuals)

25%

Dividends (company, 10%+ stock)

15%

Interest (10% on bank loans)

15%

Royalties (copyright/patents/know-how)

15%

Royalties (equipment)

10%

FTS (make available)

15%

Source: India-USA DTAA, Articles 10-12

Article-by-Article Breakdown

Article 10: Dividends

Article 10 allows the country of residence to tax dividends. The source country (where the paying company is incorporated) may also tax, but the rate is capped.

• 15% of the gross dividend if the beneficial owner is a company that holds at least 10% of the voting stock of the company paying the dividend.
• 25% of the gross dividend in all other cases, which covers individual investors holding US shares.

Like most DTAAs, the treaty gives the lower rate to substantial corporate shareholders (parent-subsidiary flows) and the higher rate to portfolio investors.

Practical example. An Indian resident individual holds shares in Apple Inc. through a US brokerage. Apple pays a quarterly dividend of $500. Without the treaty, the US withholds 30% ($150). With the treaty and a valid W-8BEN, the withholding is capped at 25% ($125). The Indian resident claims the $125 US tax as a Foreign Tax Credit in India, subject to the Rule 128 limit.

Article 11: Interest

Interest arising in one country and paid to a resident of the other may be taxed in both, but the source-country tax is limited to 10% of the gross interest where the interest is paid on a loan granted by a bank or similar financial institution (including an insurance company), and 15% in all other cases.

A significant exemption applies: interest derived and beneficially owned by the Government of the other country, its political subdivision or local authority, the Reserve Bank of India or the US Federal Reserve Banks, interest on loans extended or endorsed by the US Export-Import Bank or EXIM Bank of India, and government-approved debt is exempt from source-country tax.

This exemption is particularly relevant for sovereign wealth fund investments and RBI's holdings of US Treasury securities.

Practical example. An Indian resident holds a US savings account earning $2,000 interest in FY 2025-26. US law treats deposit interest paid to a nonresident alien as not taxable (IRC Section 871(i)), so with a valid W-8BEN on file the bank withholds nothing. The full $2,000 is taxed in India at slab rates and there is no foreign tax to credit.

Portfolio interest on registered US bonds, including US Treasuries, is also generally exempt for nonresident aliens (IRC Section 871(h)). The treaty cap of 15% (10% on bank loans) matters for interest that US law does tax, such as interest from related parties.

Article 12: Royalties and Fees for Included Services

This is the most heavily litigated article in the India-USA DTAA. It covers two streams.

Royalties are split into two sub-categories with different rates:

• 15% on royalties for the use of, or the right to use, copyrights of literary, artistic, or scientific works (including cinematographic films), patents, trade marks, designs, models, plans, secret formulas or processes, and information concerning industrial, commercial or scientific experience.
• 10% on royalties for the use of, or the right to use, industrial, commercial, or scientific equipment.

Fees for Included Services (FTS) are taxed at 15% of the gross amount (10% where the services are ancillary to the use of equipment). The India-USA treaty uses the phrase "fees for included services" rather than the more common "fees for technical services." The critical distinction is the "make available" test: a payment qualifies as FTS only if the service renders technical knowledge, experience, skill, know-how, or processes available to the payer such that the payer can apply them independently in future. Routine services that do not transfer know-how fall outside Article 12.

Article 13: Capital Gains

Unlike most provisions, Article 13 of the India-USA DTAA does not set a reduced rate. Each contracting state may tax capital gains under its own domestic law. This means:

• An Indian resident selling US stocks usually pays no US tax, because US law generally does not tax a nonresident alien's capital gains on stock unless the person is present in the US for 183 days or more in the year (US real property interests are an exception). The gain is taxed in India under the Income Tax Act. If US tax is paid, relief comes through the Foreign Tax Credit mechanism (Article 25), not through a rate cap.
• A US resident selling Indian property pays Indian capital gains tax (short-term gains at normal rates, or LTCG at 12.5% for property held over 24 months) and credits this against US tax.

The absence of a special treaty rate makes the FTC computation critical for capital gains transactions.

Article 16: Employment Income (Dependent Personal Services)

Employment income is taxable in the country of residence, and may also be taxed in the country where the employment is exercised. An H-1B professional working in the US pays US tax on the salary. This salary is not taxable in India (assuming NRI status), so no double taxation arises on the salary itself.

The exception is short-stay employment: if an Indian resident employee is present in the US for not more than 183 days in the aggregate in the relevant taxable year, the salary is paid by or for an employer who is not a US resident, and the cost is not borne by a permanent establishment, fixed base or trade or business the employer has in the US, the salary remains taxable only in India. This rule protects short-term business travellers from US withholding.

Article 25: Relief from Double Taxation

Article 25 is the mechanical provision that makes the treaty work. It provides that:

• India shall allow a resident of India a deduction from Indian income tax equal to the income tax paid in the United States on income that the treaty allows the US to tax. The deduction cannot exceed the part of the Indian tax (computed before the deduction) that is attributable to that income. Under Rule 128 this limit is worked out separately for each source of income, not on total foreign income.
• The United States shall allow a US citizen or resident a credit against US federal income tax for income tax paid to India.

The Indian implementation of this credit is through Section 90 read with Rule 128 of the Income Tax Rules. The taxpayer must file Form 67, and under Rule 128(9) it can be filed up to the end of the relevant assessment year if the return is filed under Section 139(1) or 139(4).

How to Claim DTAA Benefits: Step-by-Step

Claiming Treaty Benefits in the US (for Indian residents receiving US income)

If you are an Indian resident receiving dividends or interest from the US, you need to submit Form W-8BEN to the US withholding agent (typically your US brokerage or bank) to claim the reduced treaty rate at source. Without W-8BEN, the US withholds at the statutory 30%.

Key fields on Form W-8BEN:

• Line 9: Country of residence for tax treaty purposes: India
• Line 10: Article and paragraph of the treaty and the rate claimed, e.g., Article 10(2)(b) at 25% for dividends received by an individual

The form remains in effect from the date of signing until the last day of the third calendar year after that, unless your circumstances change, and must then be renewed.

FTC Computation: A Worked Example

Facts. Ravi, an Indian resident (salaried, total income Rs 18,00,000 after the standard deduction, including the US dividends), holds US stocks through a US brokerage. In FY 2025-26:

• US dividends received: $4,000 (Rs 3,36,000 at an assumed SBI TT buying rate of Rs 84/USD)
• US tax withheld at 25% (treaty rate for individuals via W-8BEN): $1,000 (Rs 84,000)
• Indian tax on total income under the new tax regime: Rs 1,60,000 plus 4% cess = Rs 1,66,400

FTC computation under Rule 128:

Ravi pays no extra Indian tax on the US dividend, but only Rs 31,061 of the Rs 84,000 US tax is creditable. The balance Rs 52,939 is lost in India, because FTC cannot exceed the Indian tax on that income and cannot be carried forward.

Common Mistakes When Claiming India-USA DTAA Benefits

Step 1: Missing the Form 67 deadline. Rule 128(9), as amended by Notification No. 100/2022, allows Form 67 to be filed up to the end of the relevant assessment year (31 March 2027 for AY 2026-27), provided the return is filed within the Section 139(1) due date or as a belated return under Section 139(4). Filing Form 67 before or with the ITR is still the safest course.

Step 2: Using the wrong exchange rate. Rule 128 requires the SBI telegraphic transfer buying rate on the last day of the month immediately preceding the month in which the foreign tax was deducted or paid, not the rate on the date of deduction or filing. Using a different rate creates a mismatch that triggers processing errors.

Step 3: Forgetting to fill Schedule FSI and Schedule TR. Even if Form 67 is filed, the ITR must contain the foreign income in Schedule FSI and the credit claim in Schedule TR. Missing either schedule means the CPC will not process the credit.

Step 4: Not obtaining a TRC. Under Section 90(4), a non-resident claiming treaty relief in India, such as a US resident receiving Indian interest or rent, must furnish a tax residency certificate from its home country, along with Form 10F where required (Section 90(5), Rule 21AB). Without it, treaty relief can be denied and TDS applies at domestic rates.

Step 5: Mischaracterising FTS payments. The "make available" test under Article 12 is specific to the India-USA treaty. Treating all technical service payments as FTS when they do not transfer lasting know-how inflates the withholding burden. Correct characterisation can mean the difference between 15% tax (10% for services ancillary to equipment rental) and 0% tax (if no PE exists and the payment is pure business profit under Article 7).

Step 6: Assuming US state taxes are creditable. Article 2 of the DTAA covers only US federal income taxes; US state taxes (California, New York, etc.) are not covered. Rule 128 defines foreign tax, for a treaty country, as the tax covered by the treaty, so credit for state taxes is not assured and is often contested. Take specific advice before including state tax in Form 67.

Step 7: Not renewing W-8BEN. The form generally expires on the last day of the third calendar year after the year it was signed. If it lapses, the US brokerage reverts to 30% withholding without notice. Set a calendar reminder to renew before expiry.

Limitation on Benefits (LOB) Clause: Article 24

The India-USA DTAA contains a Limitation on Benefits clause in Article 24, which restricts treaty benefits to genuine residents and prevents treaty shopping by third-country residents.

Individuals resident in India or the US qualify without further testing. A company, partnership or trust qualifies if more than 50% of its beneficial interest is owned by individuals taxable in either country (or by either government) and its income is not used in substantial part to make deductible payments to third-country persons. An entity failing this test can still qualify if it carries on an active trade or business in its home country and the income is connected with that business, if it is a publicly traded company, or if the competent authority grants benefits. Maintaining proper documentation (TRC, Form 10F for non-residents, PE declarations) remains essential.

How Tax Garden Helps

Cross-border taxation between India and the US involves the intersection of two complex tax codes and a 37-year-old treaty. Getting the characterisation right (royalty vs. FTS vs. business profit), computing FTC correctly under Rule 128, and filing Form 67 with the right supporting documents is detail-intensive work.

Tax Garden can help with:

• FTC computation under Rule 128 with correct SBI TT buying rate conversion, country-by-country and head-by-head.
• Form 67 filing on the income tax portal with proof of the US tax deducted or paid, such as US Form 1042-S or brokerage tax statements.
• ITR filing with correctly populated Schedule FSI and Schedule TR to ensure CPC processes the credit without manual intervention.
• TDS advisory for Indian companies making payments to US entities, including Section 195 withholding compliance at the correct treaty rate.

Explore our pricing plans or speak with our team to get started.

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Sources. This guide is based on the text of the Agreement between the Government of the Republic of India and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed 12 September 1989 with its related protocol, as published on incometaxindia.gov.in under the DTAA section. Domestic law references are to Sections 90, 90A, 91, and 115A of the Income Tax Act 1961 (Section 159 of the Income-tax Act 2025 from Tax Year 2026-27), and Rule 128 of the Income Tax Rules 1962 as amended by Notification No. 100/2022. US-side references are to the Internal Revenue Code Sections 871, 881, and 894, and IRS Form W-8BEN instructions. Treaty text and notifications are available at incometaxindia.gov.in/pages/international-taxation and irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z.