I still remember the panic.
It was 2016. I was sitting in my apartment in California, calculator in hand, trying to figure out my tax situation. I had rental income from a flat in Bangalore. A salary in the US. Some mutual fund gains in India.
My rough math said I owed about 60% of my income in combined taxes.
60%.
I called a friend who had moved back a few years earlier. He laughed. “Mani, have you heard of DTAA?”
That one question saved me lakhs.
The Double Taxation Avoidance Agreement between India and the USA is probably the most important piece of tax law for NRIs.
Yet most people I meet in our community have never heard of it. Or they have heard of it but do not understand how it actually works.
If you have already read our US NRI tax filing guide, you know the basics. This article goes deeper.
I will explain exactly how DTAA works and how you can use it to legally avoid paying taxes twice.
What is DTAA?
DTAA stands for Double Taxation Avoidance Agreement.
It is a treaty between two countries. The treaty says: we will not both fully tax the same income. We will coordinate. We will give credits. We will make sure our citizens do not get crushed by two tax systems.
India has DTAA agreements with over 90 countries. The one with the USA was signed in 1989 and has been amended a few times since.
Here is the core idea. Without DTAA, if you are a US citizen living in India, both countries would tax your worldwide income. You could end up paying 35% to the US and 30% to India on the same salary. That is 65%. Impossible to survive.
DTAA prevents this. It creates rules for which country gets to tax what. And it ensures you get credit for taxes paid to one country when filing in the other.
Think of it like a peace treaty. Between two tax departments. With you as the beneficiary.
Why US NRIs Specifically Need to Understand DTAA
The USA is unique.
Most countries tax based on residency. Live in France, pay French taxes. Move to Germany, pay German taxes instead.
The USA taxes based on citizenship. If you hold a US passport or Green Card, the IRS wants a piece of your income. Forever. No matter where you live. No matter where you earn.
This creates a problem for NRIs in two situations:
Situation 1: US citizen or Green Card holder living in India
India says: You are Resident here. We tax your worldwide income. USA says: You are our citizen. We tax your worldwide income. Result without DTAA: Double taxation.
Situation 2: Indian citizen in USA with Indian income
USA says: You live here. We tax your worldwide income. India says: That rental income is from Indian property. We tax it. Result without DTAA: Double taxation.
DTAA solves both situations.
For those still figuring out their status, our guide on who is an NRI explains the definitions clearly.
The Two Methods: Tax Credit vs Exemption
DTAA uses two main methods to prevent double taxation.
Method 1: Tax Credit
You pay tax in both countries. But one country gives you credit for taxes paid to the other. You only pay the difference.
Example: You earn Rs 10 lakh in India. Indian tax is Rs 1 lakh. US tax on the same income would be Rs 2.5 lakh. With tax credit, you pay Rs 1 lakh to India and Rs 1.5 lakh to USA (the difference). Total: Rs 2.5 lakh. Not Rs 3.5 lakh.
Method 2: Exemption
Certain income is taxed only in one country. The other country completely exempts it.
Example: Under India USA DTAA, government salaries are typically taxed only in the country paying the salary.
The India USA DTAA primarily uses the Tax Credit method. This is covered under Article 25 of the treaty.
Income Types and How DTAA Treats Them
This is where it gets practical. Let me break down different income types.
| Income Type | Primary Taxing Country | DTAA Treatment |
|---|---|---|
| Salary for employment | Country where work is performed | Credit in residence country |
| Rental income from property | Country where property is located | Credit in residence country |
| Dividends | Source country taxes first (usually 25% max) | Credit in residence country |
| Interest income | Source country taxes first (usually 15% max) | Credit in residence country |
| Capital gains (stocks) | Residence country primarily | Varies by asset type |
| Capital gains (real estate) | Country where property is located | Credit in residence country |
| Pension | Complex, depends on type | See pension section below |
| Business profits | Country of permanent establishment | Credit if taxed in both |
Let me explain some of these with real scenarios.
Rental Income
Priya lives in Texas. She owns a flat in Chennai that earns Rs 30,000 monthly rent.
India taxes this rental income because the property is in India. TDS of 30% is deducted.
The US also wants to tax it because Priya is a US resident.
Under DTAA, Priya reports the rental income on her US return. She claims Foreign Tax Credit for the Indian taxes paid. If US tax on that income is higher than Indian tax, she pays the difference to the IRS. If Indian tax is higher, she owes nothing extra to the US.
Dividend Income
Rahul is a US citizen now living in Bangalore. He still owns stocks in US companies that pay dividends.
The US taxes dividends at source. Usually 15% for qualified dividends.
India also wants to tax it because Rahul is now Indian Resident.
Under DTAA Article 10, the US can tax dividends at maximum 25%. Rahul then reports this on his Indian ITR and claims credit for US taxes paid.
Interest on Bank Accounts
This one catches many people.
NRE account interest is tax free in India for NRIs. So no DTAA issue there for Indian taxation.
But if you are a US citizen or Green Card holder, that NRE interest is still taxable in the US. The US does not care that India exempted it. You report it and pay US tax.
For NRO accounts, India deducts TDS at 30%. You can claim this as Foreign Tax Credit on your US return.
Understanding the difference between account types matters here. Our NRE account guide explains this in detail.
The Foreign Tax Credit: Your Primary Tool
Foreign Tax Credit (FTC) is how you actually implement DTAA benefits.
Here is how it works step by step:
Step 1: Pay tax in the source country
If you have Indian rental income, pay Indian taxes first. If you have US source income, pay US taxes first.
Step 2: Calculate your tax in the residence country
Figure out what you would owe on that same income in your country of residence.
Step 3: Claim credit for foreign taxes paid
When you file in your residence country, claim credit for taxes already paid abroad.
Step 4: Pay only the difference (if any)
If your residence country tax is higher, pay the difference. If it is lower or equal, you owe nothing additional.
For US Returns:
Use Form 1116 to claim Foreign Tax Credit. You can claim credit for income taxes paid to India.
For Indian Returns:
Claim relief under Section 90 of the Income Tax Act. Report foreign income in the appropriate schedule. Claim credit for US taxes paid.
The DTAA provisions page on our site has more specific details.
DTAA and Pensions: The Complicated Part
Retirement income under DTAA is confusing. Even tax professionals sometimes get it wrong.
Here is a simplified breakdown:
| Pension Type | US Treatment | India Treatment | DTAA Outcome |
|---|---|---|---|
| US Social Security | Taxable in US | Article 20 – taxable only in US | No India tax if you claim treaty benefit |
| 401k/IRA withdrawals | Taxable in US (withholding applies) | Taxable as income for Residents | Credit for US tax in India |
| Indian government pension | Generally not US taxable | Taxable in India | Taxed primarily in India |
| Private Indian pension | May be US taxable for citizens | Taxable in India | Credit method applies |
Social Security is special. Under Article 20 of the India USA DTAA, Social Security benefits are taxable only in the US. If you are a US citizen receiving Social Security while living in India, India should not tax it.
But here is the catch. You need to actively claim this treaty benefit. It is not automatic.
For 401k and IRA withdrawals, the US typically withholds 30%. Under DTAA, this can be reduced. But you need to file the right forms. If you are now Indian Resident, you report these withdrawals on your Indian ITR and claim credit for US withholding.
How to Actually Claim DTAA Benefits
This is what people really want to know. The practical steps.
For US Citizens and Green Card Holders Living in India:
- Calculate your total worldwide income
- Pay taxes to India on Indian source income (TDS gets deducted automatically in most cases)
- File US tax return reporting worldwide income
- Attach Form 1116 to claim Foreign Tax Credit for Indian taxes paid
- If you have specific exempt income under DTAA (like government pension), reference the relevant treaty article
For Indian Citizens in the USA with Indian Income:
- Pay Indian taxes on Indian source income (rental, interest, capital gains)
- Keep records of all Indian taxes paid including TDS certificates
- File US return reporting worldwide income
- Claim Foreign Tax Credit on Form 1116 for Indian taxes paid
- Make sure you do not claim credit exceeding the actual foreign tax paid
For NRIs Returning to India:
- Understand that your status changes during the transition year
- For the year of return, you may be NRI for part and Resident for part
- Use RNOR status if applicable (no worldwide taxation for up to 2 years in most cases)
- File in both countries as required
- Claim appropriate credits based on income sources
Our return to India checklist includes tax related steps.
Tax Residency Certificate: The Document You Need
To claim DTAA benefits, you often need a Tax Residency Certificate (TRC).
This is official proof of your tax residency in one country. You show it to the other country to claim treaty benefits.
Getting TRC in India:
Apply to your Assessing Officer in Form 10FA. You will get a certificate in Form 10FB. This confirms you are tax resident of India.
Getting TRC in USA:
Request Form 6166 from the IRS. This is the US equivalent of a TRC. It certifies you are a US tax resident for treaty purposes.
You may also need Form 10F for claiming benefits in India. This is a self declaration form providing details required under the treaty.
Many banks and institutions in India now ask for TRC before applying reduced TDS rates under DTAA. Keep this document ready.
Common DTAA Mistakes That Cost Money
I have seen these errors repeatedly in our community:
Mistake 1: Not claiming Foreign Tax Credit at all
Some people just pay taxes in both countries without claiming any credit. They think that is how it works. It is not. Claim your credits.
Mistake 2: Claiming credit in the wrong country
The general rule is: pay in the source country, claim credit in the residence country. Getting this backwards creates problems.
Mistake 3: Missing treaty benefits on specific income types
Social Security is a good example. Many US citizens in India pay Indian tax on Social Security when they should not. The treaty exempts it. But you have to know and claim it.
Mistake 4: Not getting TRC when needed
Without TRC, you may face higher TDS in India. Get the certificate proactively.
Mistake 5: Ignoring state taxes
DTAA is between countries. US state taxes are separate. If you have California source income while living in India, California may still want their share. And India does not give credit for US state taxes as easily as federal taxes.
Mistake 6: Wrong timing of credit claims
Tax years are different. India follows April to March. USA follows calendar year. If you paid Indian tax in January 2024 for FY 2023-24, which US tax year do you claim it in? Usually the year you paid it. But consult a professional for your specific situation.
DTAA Rate Limits: What the Treaty Caps
One important function of DTAA is capping tax rates on certain income types. This prevents excessive taxation.
| Income Type | Maximum Tax Rate in Source Country Under DTAA |
|---|---|
| Dividends (general) | 25% |
| Dividends (10%+ ownership) | 15% |
| Interest | 15% |
| Royalties | 15% |
| Fees for technical services | 15% |
What this means practically:
If you are a US resident receiving interest from an Indian bank, India can charge maximum 15% TDS under DTAA. Without the treaty, they could charge 30%.
To get this reduced rate, you typically need to submit TRC and Form 10F to the Indian institution.
For dividends from Indian companies to US residents, the maximum rate is 25%. This is usually better than the standard 20% Indian dividend tax anyway, but the treaty provision exists.
Special Cases: Things That Confuse Everyone
Capital Gains on Mutual Funds
Indian mutual funds are classified as Passive Foreign Investment Companies (PFICs) by the IRS. The tax treatment is harsh. DTAA does not really help here because the issue is how the US classifies the income, not double taxation per se.
Many NRIs in the USA avoid Indian mutual funds for this reason. It is just too complicated.
If you hold Indian mutual funds and are US tax resident, get professional help. The investment options for NRIs guide discusses alternatives.
Stock Options and RSUs
If you worked in the US, got RSUs, then moved to India, which country taxes the gain?
Generally, the country where you performed the services that earned the RSUs has taxing rights. But if the RSUs vest after you move, it gets complicated. There may be allocation formulas involved. DTAA applies but determining which income goes where requires careful analysis.
Rental Property Depreciation
Both countries allow depreciation on rental property. But the rules differ. The US allows more aggressive depreciation. India has its own rates. DTAA does not harmonize this. You calculate depreciation separately for each country’s return.
Gifts and Inheritance
This is good news. Gifts and inheritance are generally not covered by income tax DTAA because they are not income. India does not have inheritance tax. The US has estate tax but it applies to the giver’s estate, not the receiver. For most NRIs, receiving inheritance from India while living in the US creates no double taxation issue.
But if you are gifting from the US to India, be aware of US gift tax rules. Amounts over the annual exclusion require reporting.
DTAA and ITR Filing: Which Form to Use
If you are filing Indian ITR and claiming DTAA benefits:
| Your Situation | Recommended ITR Form | Key Schedules |
|---|---|---|
| NRI with Indian salary only | ITR-2 | Schedule S |
| NRI with business income | ITR-3 | Schedule BP |
| Resident with foreign income | ITR-2 or ITR-3 | Schedule FSI, Schedule TR |
| Claiming foreign tax credit | ITR-2 or ITR-3 | Schedule TR (Tax Relief) |
| Reporting foreign assets | ITR-2 or ITR-3 | Schedule FA |
Schedule TR is specifically for claiming relief under DTAA. You report the country, type of income, tax paid abroad, and relief claimed.
Schedule FSI is for reporting foreign source income in detail.
If you are returning NRI becoming Resident, our ITR guide for NRIs walks through the process.
Getting Professional Help: When It is Worth It
I am a big believer in learning to do things yourself. That is why I write these guides.
But DTAA situations can get genuinely complex. Get professional help if:
- You have significant income in both countries (more than Rs 50 lakh combined)
- You are selling major assets in either country
- You have RSUs or stock options that vested across multiple countries
- You are dealing with retirement account distributions
- You are uncertain about your residential status in either country
- You have received notices from either tax department
A good CA in India who understands international taxation charges Rs 15,000 to Rs 50,000 for comprehensive filing. A US CPA with expat experience charges $500 to $2,000.
Compare that to the potential savings or penalties. Usually worth it for complex situations.
Our financial advisors directory lists professionals who understand NRI taxation.
Frequently Asked Questions
Q: If I am an NRI, do I need to worry about DTAA?
Only if you have income in both countries. If you are NRI in the US with no Indian income, DTAA does not apply to you. If you have Indian rental income or investments while living in the US, then yes, DTAA matters.
Q: Can I choose not to use DTAA and just pay taxes in both countries?
Technically yes. Nobody forces you to claim Foreign Tax Credit. But why would you pay more than you have to?
Q: Does DTAA automatically apply or do I have to claim it?
You have to claim it. Through Foreign Tax Credit in your tax returns. Through TRC submissions for reduced TDS. It is not automatic.
Q: What if India and USA both claim I am their tax resident?
The DTAA has tie breaker rules. They look at permanent home, center of vital interests, habitual abode, and nationality. In that order. Whichever country wins the tie breaker is your residence country for treaty purposes.
Q: Can DTAA help me pay zero taxes?
No. DTAA prevents double taxation. It does not prevent all taxation. You will pay taxes to at least one country on each type of income.
Q: How long do I need to keep records for DTAA claims?
Keep records for at least 7 years. Both Indian and US tax authorities can audit within this period. Keep TDS certificates, TRC copies, Form 1116 worksheets, and all supporting documents.
Q: Is tax planning around DTAA legal?
Yes. Using treaty provisions to minimize double taxation is completely legal. That is the whole point of DTAA. Tax evasion is illegal. Tax planning is not.
Quick Reference: Key DTAA Articles for India USA
For those who want to read the actual treaty:
| Article | Topic | Key Point |
|---|---|---|
| Article 4 | Residence | Defines who is resident of each country |
| Article 6 | Income from real property | Taxed in country where property is located |
| Article 10 | Dividends | Maximum 25% source country tax |
| Article 11 | Interest | Maximum 15% source country tax |
| Article 12 | Royalties and fees | Maximum 15% source country tax |
| Article 14 | Independent personal services | Taxed where services performed |
| Article 15 | Dependent personal services (employment) | Taxed where employment exercised |
| Article 20 | Social Security | Taxable only in paying country |
| Article 25 | Relief from double taxation | Credit method prescribed |
The full treaty text is available on the Income Tax Department website.
The Bottom Line
DTAA exists to protect you. Use it.
When I was panicking about 60% combined taxation back in 2016, I had not understood how Foreign Tax Credit works. Once I did, my actual tax burden was manageable. Still significant. But not destructive.
Here is what you need to remember:
- DTAA prevents double taxation through tax credits
- Pay tax in the source country first
- Claim credit in your residence country
- Get Tax Residency Certificate when needed
- Different income types have different rules
- Keep meticulous records
- Get professional help for complex situations
The money you save by understanding DTAA properly could fund your next trip back home. Or pay for your kids’ school admission. Or just give you peace of mind.
If you are planning your move back and want to connect with others who have navigated these exact issues, join our WhatsApp community at https://backtoindia.com/groups. Over 20,000 NRIs helping each other with real, lived experience. It is free and volunteer run.
Got a specific DTAA question? Ask in the group. Someone there has definitely faced your exact situation.
Disclaimer: This article is for informational purposes only. Tax laws are complex and change frequently. Always consult qualified tax professionals in both India and the USA for advice specific to your situation. The author is not a tax professional.
Sources:
- India USA DTAA Full Text: https://www.incometax.gov.in/iec/foportal/sites/default/files/2019-11/DTAA_united_states.pdf
- Income Tax Department – DTAA Overview: https://www.incometax.gov.in
- IRS – Foreign Tax Credit: https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit
- IRS Form 1116 Instructions: https://www.irs.gov/instructions/i1116
- IRS Form 6166 (US TRC): https://www.irs.gov/individuals/international-taxpayers/certificate-of-residence
- Section 90 of Indian Income Tax Act: https://www.incometax.gov.in
Leave a Reply