Double Taxation Avoidance Agreement (DTAA) Between India and USA

The Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between two countries to ensure that the same income is not taxed twice. The DTAA between India and the USA aims to promote cross-border trade, investment, and cooperation by reducing the tax burden on individuals and companies earning income in both countries.

This agreement plays a key role in making India an attractive investment destination for American companies and provides relief to Non-Resident Indians (NRIs) working in the United States. It helps taxpayers avoid paying tax twice on the same income and ensures better tax compliance.

Meaning of DTAA

When a person or company earns income in more than one country, both countries may claim the right to tax that income. This leads to double taxation, which increases the financial burden on taxpayers. To prevent this, countries enter into Double Taxation Avoidance Agreements.

The India–USA DTAA was signed with the objective of eliminating double taxation of income without allowing tax evasion. It allows taxpayers to claim relief either by exemption or by tax credit, depending on the nature of income and the agreement’s provisions.

Objectives of DTAA

The main purposes of the DTAA between India and the USA are:

• To prevent double taxation on the same income in both countries.
• To promote the flow of investments and trade between India and the USA.
• To encourage exchange of tax information and prevent tax evasion or avoidance.
• To ensure transparency and cooperation between tax authorities.
• To provide certainty to taxpayers regarding their tax liabilities in both countries.

Applicability of the India–USA DTAA

The India–USA DTAA applies to any individual, company, trust, partnership, or other taxable entity that earns income in both India and the United States.

Taxes Covered

In the United States, the DTAA applies to:

• Federal Income Tax imposed by the Internal Revenue Code (IRC).
• Exercise taxes on insurance premiums paid to foreign insurers (only if the risks are not reinsured with a non-exempt person).
• Exercise taxes related to private foundations.

However, the DTAA does not apply to:

• Accumulated Earnings Tax.
• Personal Holding Company Tax.
• Social Security Taxes.

In India, the DTAA applies to: Income Tax (including any surcharge or surtax).

However, it does not apply to: Income tax on undistributed income of companies.

The provisions of the DTAA also do not cover penalties, fines, or defaulted taxes.

Meaning of Contracting States

The term Contracting States refers to the countries that have entered into the agreement. In this case, the contracting states are India and the United States of America.

Residential Status under the India–USA DTAA

Residential status plays an important role in determining where a person’s income will be taxed. According to the DTAA, a resident is any person who, under the laws of that country, is liable to pay tax because of domicile, residence, citizenship, place of management, or place of incorporation.

However, there are cases when a person may qualify as a resident of both India and the USA. In such cases, the “tie-breaker rule” under the DTAA helps decide which country will treat the person as a resident.

Determination of Residential Status

Important Provisions of Double Taxation Avoidance Agreement

Article 6: Income from Immovable Property

According to the India–USA DTAA, income derived from immovable property (such as land or buildings) is taxed in the country where the property is located.

For example, if a US resident earns rental income from a property situated in India, that income will be taxable in India.

The term “income from immovable property” includes:

• Income from agriculture or forestry.
• Income derived from direct use, letting, or use in any other form of immovable property.
• Income from immovable property used for business or independent personal services.

Article 10: Dividend Income

Dividends are another key area covered under the DTAA.

According to the agreement:

• Dividends paid by a company resident in one country to a resident of the other country may be taxed in both countries.
• However, the rate of tax in the country where the dividend originates (source country) is limited.

DTAA Rates Between India and USA for Dividends

For example, if an Indian company pays dividends to a shareholder in the United States, both India and the USA may tax the income. However, India cannot tax it beyond the rates mentioned above.

Article 11: Interest Income

Interest income is another category covered under the DTAA.

According to the agreement:

• Interest arising in one country and paid to a resident of the other country may be taxed in both countries.
• However, the tax rate in the source country is limited.
  

DTAA Rates Between India and USA for Interest

Interest also includes prizes or premiums attached to debt securities, but it does not include penalty charges for late payments.

If interest is paid above normal market rates because of a special relationship between the payer and receiver, only the market rate is considered under the DTAA.

Article 13: Capital Gains

The DTAA provides that capital gains are generally taxed according to the domestic laws of each country.

For example, if a US resident sells an immovable property located in India, the capital gain will be taxed in India as per Indian tax laws. However, exceptions are made for profits from shipping or air transport enterprises, which are usually taxed in the country of residence of the enterprise.

Payments to Professors, Teachers, and Research Scholars

If a teacher or researcher from India moves to the USA for teaching or research work, the income earned there may be exempt from tax in the USA under certain conditions:

• The period of stay does not exceed two years.
• The individual was a resident of India immediately before visiting the USA.
• The research is conducted in the public interest and not for private profit.

This exemption is available for a maximum of two years from the date of first arrival.

Article 17: Director’s Fees

If an Indian resident serves as a director of a company based in the USA, the director’s remuneration or fees are taxed in the USA.

Article 21: Payments to Students and Apprentices

The DTAA also provides special relief for students and apprentices.

For instance, if an Indian student moves to the USA for higher studies, any money received from India for education or maintenance is not taxable in the USA.

Additionally, scholarships or income from part-time employment earned during education are also exempt for the period required to complete the studies.

Relief from Double Taxation

The main objective of the DTAA is to grant relief from double taxation to avoid undue tax burdens. Both countries offer mechanisms to achieve this.

Relief in the United States

The USA allows its residents to claim a tax credit for:

• Income tax paid in India.
• Taxes paid by Indian companies on profits from which dividends are distributed to US shareholders (if the US company owns at least 10% of the shares).

Relief in India

India also provides relief to its residents who pay taxes in the United States. The Indian resident can claim:

• A tax credit equal to the amount of tax paid in the USA.
• However, the credit cannot exceed the amount of Indian tax payable on that same income.

This ensures that the total tax paid in both countries does not exceed the higher of the two applicable tax rates.

Reporting Requirements in India

Taxpayers must follow certain procedures while claiming relief under the DTAA in India.

Schedule FSI (Foreign Source of Income)

It includes information such as:

• Country code and taxpayer identification number.
• Income earned outside India.
• Taxes paid abroad.
• Applicable DTAA article under which relief is claimed.

Schedule TR (Tax Relief)

The details entered in Schedule FSI are reflected in Schedule TR to calculate the exact tax relief available.

Schedule FA (Foreign Assets)

Taxpayers holding foreign assets or income must report them under Schedule FA in the income tax return.

Form 67

Before claiming foreign tax credit, taxpayers must submit Form 67 through the Income Tax Department’s website. This form provides details of foreign income and the tax paid abroad.

Measures Similar to DTAAs

Apart from DTAAs, India has also signed multilateral agreements related to the exchange of tax information.

One such mechanism is the Country-by-Country (CbC) Reporting under the Convention on Mutual Administrative Assistance in Tax Matters. It requires multinational groups to provide financial details of transactions in other countries, ensuring transparency and preventing tax evasion.

These global frameworks complement the objectives of DTAA and strengthen international cooperation in taxation.

Practical Significance of DTAA Between India and USA

The India–USA DTAA provides immense relief to taxpayers and investors. It ensures that income such as salary, dividends, interest, royalties, and capital gains is not taxed twice. It also creates an atmosphere of mutual trust between the two countries and promotes business, education, and professional exchanges.

For example:

• An Indian software engineer working in the USA can claim credit for taxes paid there when filing Indian tax returns.
• A US company earning income from investments in India can enjoy reduced tax rates under the DTAA.

By defining clear rules for taxation and providing relief mechanisms, the DTAA strengthens bilateral economic relations.

Conclusion

The Double Taxation Avoidance Agreement between India and the USA is an essential framework for promoting cross-border economic activity. It provides certainty, fairness, and relief to taxpayers while ensuring that income is taxed only once.

By setting specific DTAA rates between India and USA—such as 10% or 15% for interest and 15% or 25% for dividends—the agreement creates transparency and reduces the chances of tax disputes.