“Synopsis”
The India-USA Double Taxation Avoidance Agreement (DTAA) helps NRIs living in the United States avoid paying tax twice on the same income earned in India and the US. This blog explains how NRIs can benefit from the treaty provisions, claim tax credits, and file relevant forms like Form 8965 to reduce their overall tax burden. Understanding these provisions is essential for NRIs to stay compliant and save on taxes in 2025.
What is the India-USA DTAA?
The India-USA DTAA is a bilateral tax treaty designed to eliminate or reduce the tax burden on income that may be taxable in both countries. It prevents NRIs and residents from paying tax twice on the same income, providing clarity on which country has taxing rights.
Why is DTAA Important for NRIs in the US?
NRIs who earn income from India while residing in the US can face double taxation—once in India and once in the US. The DTAA provides relief by:
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Allowing NRIs to claim foreign tax credit in the US for taxes paid in India.
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Defining which income is taxable in which country.
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Reducing withholding tax rates on dividends, interest, and royalties.
Key Provisions of India-USA DTAA for NRIs
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Income Taxation Rules:
Income such as salary, business profits, dividends, interest, and capital gains is taxed based on treaty provisions that allocate taxing rights between India and the US. -
Reduced Withholding Tax Rates:
The DTAA sets lower withholding tax rates on interest (usually 15%), dividends, and royalties compared to standard Indian rates. -
Foreign Tax Credit (FTC):
US residents can claim credit for taxes paid in India against their US tax liability to avoid double taxation. -
Exchange of Information:
The treaty allows tax authorities of both countries to share information to prevent tax evasion.
How NRIs Can Claim Foreign Tax Credit in the US?
NRIs must file Form 1116 (Foreign Tax Credit) with their US tax returns to claim credit for Indian taxes paid on income earned from India. This credit offsets their US tax liability, reducing overall taxes owed.
What is Form 8965?
Form 8965 is used to report exemptions from the Affordable Care Act’s individual mandate and may be relevant for NRIs maintaining healthcare coverage status in the US, but it is separate from tax credit claims. For tax credits, focus remains on Form 1116.
Steps for NRIs to Avoid Double Taxation
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Maintain detailed records of Indian income and taxes paid.
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Use the India-USA DTAA provisions to determine taxability.
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Claim foreign tax credit on the US tax return using Form 1116.
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Consult a tax professional to ensure accurate filing and compliance.
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File income tax returns timely in both countries.
Important Tips for NRIs on India-USA Taxation
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Always verify if the income type is covered under DTAA.
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Check the latest tax rates and treaty amendments.
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Understand the difference between tax residency and NRI status.
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Keep track of deadlines for tax filings in both India and the US.
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Use tax planning strategies to minimize tax liability legally.
Conclusion
The India-USA DTAA is a vital tool for NRIs residing in the US to avoid paying tax twice on the same income. By understanding the treaty provisions, claiming foreign tax credits, and filing the correct forms, NRIs can optimize their tax obligations while remaining compliant. Staying informed and consulting experts will help make the most of these benefits in 2025.
