In a world that is becoming increasingly globalized, individuals and businesses earn income from around the world. While globalization opens opportunities for individuals and businesses worldwide, it also gives rise to the problem of double taxation. To solve this problem, countries sign Double Taxation Avoidance Agreements. One of the most commonly used agreements is that between India and America.
This blog describes the tax treatment of income in accordance with the India-US DTAA and its important provisions to make taxpayers aware of how this treaty works.
Understanding the India–USA DTAA
The India-USA Double Taxation Avoidance Agreement (DTAA), signed on 12 September 1989; effective from 20 Dec 1990(FY 1991-92), intends to prevent the taxation of the same income on the source country as well as the residence country. In other words, it prevents the taxation of the same income in two different countries. Apart from the prevention of double taxation, the agreement is also intended to prevent tax evasion and encourage trade between the two countries.
The agreement applies to persons who are residents of either India or the United States of America. The agreement applies to income taxes levied in both countries. However, in India, this arrangement also includes any applicable surcharge, while in the United States, only Federal Income Taxes are applicable, excluding State Taxes.
Residential Status and Tie-Breaker Rules
In order to be eligible to claim benefits under the DTAA, a taxpayer is required to be a resident under Article 4. In situations where a taxpayer is a resident of both India and the United States of America under the respective taxing regimes, the treaty applies tie-breaker rules. The tie-breaker rules involve considerations of permanent home, centre of vital interests, habitual residence, or nationality. It prevents a taxpayer from being a resident of two countries simultaneously.
Tax Treatment of Different Types of Income
- Income from Immovable Property
As per Article 6, income arising from immovable property, such as rental income, is to be taxed in the country where the property is located. e.g., when an Indian national owns a property in the USA and earns rental income from it, the USA has the primary right to tax the income.
- Business Profits and Permanent Establishment
Article 7: It deals with the case of business profits. In the usual case, the profit earned from a business is liable to tax in the same country where the resident company is based. This applies unless the company conducts a certain level of operation in the other state through a ‘Permanent Establishment’ or PE. In most scenarios, these include a fixed place of business. This might be in the form of an office, branch, a manufacturing plant, or even a construction site that exceeds a fixed threshold of time. In such a situation, the source state is free to tax the profits attributed to that PE.
This is especially important for multi-national companies and startups doing business in India and the USA.
- Income from Employment
Under Article 15, the salary income is taxable in the source country where the employment is exercised. A prerequisite for the income to be taxed only in the residence country is that all of the following conditions should be met:
- Employee stays ≤ 90 days in the fiscal year of the source country
- Remuneration ≤US$10,000
- Paid by non-resident employer AND not charged to a P.E. in source country
Example: Indian working in USA <90 days, paid by Indian employer – no US PE = taxed only in India.
Exit and Liquidity Considerations
- Income from Immovable Property
As per Article 6, income arising from immovable property, such as rental income, is to be taxed in the country where the property is located. e.g., when an Indian national owns a property in the USA and earns rental income from it, the USA has the primary right to tax the income.
- Business Profits and Permanent Establishment
Article 7: It deals with the case of business profits. In the usual case, the profit earned from a business is liable to tax in the same country where the resident company is based. This applies unless the company conducts a certain level of operation in the other state through a ‘Permanent Establishment’ or PE. In most scenarios, these include a fixed place of business. This might be in the form of an office, branch, a manufacturing plant, or even a construction site that exceeds a fixed threshold of time. In such a situation, the source state is free to tax the profits attributed to that PE.
This is especially important for multi-national companies and startups doing business in India and the USA.
- Income from Employment
Under Article 15, the salary income is taxable in the source country where the employment is exercised. A prerequisite for the income to be taxed only in the residence country is that all of the following conditions should be met:
- Employee stays ≤ 90 days in the fiscal year of the source country
- Remuneration ≤US$10,000
- Paid by non-resident employer AND not charged to a P.E. in source country
Example: Indian working in USA <90 days, paid by Indian employer – no US PE = taxed only in India.
Passive Income: Dividends, Interest, and Royalties
Dividends and Interest
Dividends (Article 10): Taxable in both countries. Tax withholding in source country:
- 15% for direct dividends (≥ 10% ownership for 12 months)
- 25% for portfolio dividends (<10% ownership)
- Interest (Article 11): Typically, 15%, reduced to 10%-12.5% for banks/government entities
Residence country allows foreign tax credit. A foreign tax credit is then offered in respect of tax paid to the country of residency.
Royalties and Fees for Included Services
The most striking feature of the DTAA between India and the USA is Article 12. Royalties and fees for included services may be taxed in both countries, but limited to 15% tax in the source country. Importantly, in relation to technical or consultancy services that are chargeable to tax, they must “make available” technical knowledge, experience, or skill to the recipient. The “make available” condition has considerably reduced the scope of technical services that are liable to tax and have been the subject of significant judicial interpretation in India.
Capital Gains
The taxation of capital gains varies according to the type of property owned. Gains arising out of immovable property are liable to taxation within the country where the property is geographically located, whereas gains derived from the sale of shares are liable to taxation within the country of residence, with certain exceptions.
Avoidance of Double Taxation
The India-USA Double Taxation Avoidance Agreement applies the tax credit treatment under Article 25. It provides that income is liable to tax in both Contracting States, but the taxing state permits a credit against tax due to tax charged in the source state, up to the amount of tax payable on that income.
Other Important Provisions
The treaty also includes Non-Discrimination Articles, whereby the citizens of one country should not be treated worse from a tax perspective in the other. The Mutual Agreement Procedure (MAP) enables taxpayers to clarify Treaty Interpretations. Finally, the Treaty includes articles such as Information Exchange and Limitation of Benefits to prevent Tax Evasion and Treaty Shopping.
How to Avail DTAA Benefits
India residents: Tax Residency Certificate (TRC) + Form 10F + Form 67 for Foreign Tax Credit US residents: Completed Form 8833 (treaty position) and Form 1116 (FTC claim).
Documents required: TRC issued by tax authority/TRC number + Income proof+ Withholding certificates
Conclusion
The DTAA between India and the USA is an integral part of the international tax cooperation efforts of both nations. It provides a clear-cut division of taxation authority and the mechanism for the avoidance of tax burdens on taxpayers. It plays a critical role in facilitating tax planning for taxpayers who are actively operating in the international business environment.
Shekhar Mehra is a legal writer and researcher at LEGALLANDS LLP, specializing in corporate law, business structuring, regulatory compliance and post-incorporation governance. He regularly contributes in-depth articles and thought-leadership pieces focusing on entity formation, governance frameworks, cross-border compliance and emerging policy reforms — particularly for India-UAE trade & investment contexts. His work combines technical legal insight with practical business strategy, to guide entrepreneurs, in-house legal teams and advisers through today’s complex regulatory environment.
