United States–India Income Tax Treaty

In today’s interconnected world, businesses and individuals are increasingly engaging in cross-border activities. The United States–India Income Tax Treaty plays a critical role in eliminating the barriers to international trade and investment by reducing the burden of double taxation and providing a structured framework for tax cooperation. For businesses expanding into India or Indian nationals investing in the U.S., this treaty offers valuable opportunities for tax efficiency and regulatory clarity.

At H&CO, our mission is to empower organizations and individuals to conquer new frontiers by providing the guidance they need to succeed globally. This comprehensive guide will help you understand the practical applications of the U.S.–India Tax Treaty and how it can benefit your international operations or investments.

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Key Takeaways

• The U.S.–India Tax Treaty provides important benefits by preventing double taxation, reducing withholding tax rates on dividends, interest, and royalties, and clarifying taxing rights between the two countries.

• It supports cross-border trade and investment, outlines permanent establishment rules, and includes mechanisms for dispute resolution.

• Proper use of the treaty can help individuals and businesses optimize their international tax obligations and enhance compliance.

Overview of the Treaty

The United States and India signed their tax treaty in 1989, with amendments introduced in the 2000 protocol, designed to align with evolving economic and tax landscapes. The treaty’s core objectives include:

• Eliminating double taxation of income

• Preventing tax evasion and avoidance

• Clarifying taxing rights between the two countries

• Reducing withholding taxes on cross-border payments

• Fostering economic cooperation through transparent tax treatment

The treaty is built on OECD and UN Model Conventions and ensures consistency and predictability for businesses operating in both jurisdictions.

Economic Relationship Between the U.S. and India

India and the United States share a robust and evolving economic partnership characterized by growing trade volumes, direct investments, technology collaborations, and workforce mobility. As of recent years, bilateral trade has surpassed $190 billion. U.S. companies are among the largest foreign investors in India, and Indian companies have significantly invested in U.S. real estate, tech startups, and service industries.

The tax treaty strengthens this relationship by reducing tax-related friction and providing incentives for cross-border activities. The treaty also clarifies the tax obligations and incentives for individuals and businesses in their respective countries. This aligns with H&CO’s vision to support businesses with global ambitions by offering peace of mind and practical solutions across borders.

Key Provisions of the U.S.–India Tax Treaty

Double Taxation Relief

One of the central purposes of the treaty is to prevent double taxation. The treaty provides a mechanism for taxpayers to receive a foreign tax credit in their country of residence for taxes paid in the source country.

Dividends (15%, 25%)

A rate of 15 percent applies to dividends paid to a company owning at least 10 percent of the voting stock of the paying company; if this ownership threshold is not met, the rate increases to 25 percent.

Interest (10%, 15%)

Under the U.S.-India tax treaty, a 10 percent withholding rate applies to interest paid on loans provided by banks engaged in genuine banking activities or by similar financial institutions. In other cases, the rate is 15 percent.

Royalties (10%, 15%)

The 10 percent rate applies to royalties for industrial, commercial, or scientific equipment use, excluding income from ship or aircraft operations in international traffic. The 15 percent rate applies to royalties for copyrights, patents, trademarks, designs, plans, trade secrets, and related rights, including gains tied to their use or disposition.

Permanent Establishment (PE)

A foreign enterprise is taxed in the source country only if it has a permanent establishment there. PE is generally defined as a fixed place of business, such as an office, factory, or branch. Independent agents and preparatory activities are excluded from PE status.

Non-Discrimination Clause

The treaty prohibits discriminatory tax treatment of nationals or businesses of one country operating in the other, ensuring a level playing field.

Mutual Agreement Procedure (MAP)

In case of disputes or double taxation not resolved by domestic law, taxpayers can request assistance through the Mutual Agreement Procedure, allowing tax authorities of both countries to resolve the issue collaboratively.

Taxation of Income Under the Treaty

The U.S.–India tax treaty outlines how specific categories of income are taxed to minimize the risk of double taxation:

Technical Fees: Technical fees are capped at 15 percent. Technical fees include services like software development, consultancy, and IT infrastructure setup—beneficial for the large U.S.-India tech service corridor.

Capital Gains: Gains from the sale of immovable property are taxed in the country where the property is located. For shares or securities, taxation depends on residency and holding period, though the U.S. generally reserves the right to tax capital gains from U.S. sources.

Business Profits: Business profits are taxed only in the country of residence unless a PE exists in the other country. This is crucial for structuring joint ventures, representative offices, or outsourcing centers.

Employment and Pension Income: A citizen of either contracting state may be subject to different tax treatment depending on their residency status and the provisions of the treaty. A foreign resident working in the US or India may be taxed differently on payments received for services provided, depending on the relevant tax treaty article. Salaries are typically taxed where employment is exercised. Pensions and social security benefits are taxed only in the country of residence of the recipient.

Income from Real Property: Income from real property, such as rental income, is specifically addressed under the US–India tax treaty to help taxpayers avoid double taxation on the same income. According to the treaty, the country where the real property is located has the primary right to tax the income generated from it. For example, if a US resident owns rental property in India, India has the right to tax the rental income under the India tax treaty. Conversely, if an Indian resident owns real property in the US, the US will tax the rental income.

Research and Education: The US-India tax treaty offers specific benefits for Indian residents engaged in research and education in the US. Under Article 21 of the treaty, Indian students and research scholars who are temporarily present in the US can claim the same standard deductions as US citizens on their us tax returns, helping to reduce their overall tax liability. Additionally, the treaty provides exemptions for certain types of income earned by Indian researchers and scholars, provided they are not considered US tax residents.

International Tax Compliance Requirements – U.S.–India Tax Treaty

Compliance with U.S. and Indian tax laws is critical for individuals and businesses involved in cross-border operations. Failure to meet reporting obligations can lead to significant financial penalties and complications. Individuals and businesses must also ensure they pay tax in the appropriate jurisdiction as required by the treaty. The U.S.–India Income Tax Treaty offers clear guidance to support compliance, particularly for income arising from permanent establishments (PEs) in either country.

Properly reporting foreign source income is crucial to avoid double taxation and ensure compliance with international tax laws. Depending on the type of income, relief may be provided through exemptions, credits, or reductions.

Proper compliance, reporting, and adherence to deadlines are essential to benefit from the U.S.–India Tax Treaty. Key considerations to ensure compliance include:

• Maintain Accurate Documentation: Keeping thorough and accurate records is essential to substantiate claims for reduced withholding tax rates or exemptions. This may include Tax Residency Certificates (TRCs), detailed financial statements, and complete income documentation.

• Accurate Foreign Income Reporting: Individuals and businesses are required to precisely report all foreign-sourced income to prevent double taxation and avoid potential penalties. Failure to comply may lead to audits and legal repercussions.

International Tax Forms – U.S.–India Tax Treaty

Under the U.S.–India Income Tax Treaty, individuals and businesses must submit specific tax forms to claim treaty benefits such as reduced withholding tax rates, tax exemptions, or foreign tax credits. A tax treaty benefit may include reduced withholding rates, exemptions, or credits, and proper documentation is required to claim these benefits. Below are some commonly used forms for tax compliance under the treaty:

For Indian Residents and Entities Receiving U.S. Income

• Form W-8BEN (Individuals):  Used by non-U.S. individuals (including Indian residents) to certify foreign status and claim treaty benefits like reduced withholding tax rates on U.S.-source income (dividends, interest, royalties). The employer may be required to verify the form and ensure proper withholding and reporting for foreign employees.

• Form W-8BEN-E (Entities): Used by foreign entities (e.g., Indian companies) to claim tax treaty benefits and establish their status for U.S. withholding tax purposes.

• Form 1042-S:  Issued by U.S. withholding agents to report U.S.-source income paid to foreign persons along with any withholding and treaty benefits applied.

• Form 8833 (Treaty-Based Return Position Disclosure): Filed by taxpayers who take a treaty-based position that affects their U.S. tax liability, such as claiming a tax exemption or reduced rate under the treaty.

• Tax Residency Certificate (TRC):  Issued by Indian tax authorities to certify Indian residency for treaty purposes, often required by U.S. withholding agents to grant treaty benefits.

For U.S. Taxpayers with Indian Income or Residency

• Form 1116 (Foreign Tax Credit):
  Used to claim a credit against U.S. tax for income taxes paid to India, preventing double taxation.

• Form 2555 (Foreign Earned Income Exclusion):
  Enables U.S. citizens or residents living and working in India to exclude foreign-earned income from U.S. taxable income under certain conditions.

• Form 8802:
  Used by U.S. taxpayers to request IRS certification of U.S. residency (Form 6166), which may be needed to claim treaty benefits in India.

Individual Income Tax Compliance and Tax Preparation

Compliance with individual income tax regulations under the U.S.–India Tax Treaty is vital to avoid double taxation and optimize tax benefits. Individuals must accurately report worldwide income, including income sourced from India or the U.S., and utilize available treaty provisions such as reduced withholding rates and foreign tax credits. Timely filing of required forms and maintaining proper documentation ensures smooth compliance and helps maximize tax efficiency for cross-border taxpayers.

Business Income Tax Compliance and Tax Preparation

Businesses engaged in cross-border activities between the U.S. and India must carefully comply with tax regulations to prevent double taxation and ensure proper reporting. The U.S.–India Tax Treaty provides clear rules on taxation of business profits, especially concerning permanent establishments. Accurate income reporting, timely filing of relevant forms, and strategic use of treaty benefits like reduced withholding rates and foreign tax credits are essential for effective tax management and minimizing liabilities.

Businesses can claim foreign tax credits, reduced withholding rates, and treaty-based exemptions by filing the appropriate forms, such as Form 8833. Any withholding tax paid can be credited against the income tax liability, which is crucial for managing overall tax obligations. Proper compliance, documentation, and strategic tax planning help optimize tax obligations and prevent penalties.

U.S. Expat Income Tax Compliance and Planning

U.S. expatriates living in India face unique tax compliance challenges, as they are subject to U.S. taxation on their worldwide income. A U.S. citizen is generally subject to U.S. tax on worldwide income, regardless of residence, but may benefit from treaty provisions. The U.S.–India Tax Treaty, along with the Totalization Agreement, helps prevent double taxation and coordinate social security contributions. Expats can benefit from provisions such as the Foreign Earned Income Exclusion (Form 2555) and Foreign Tax Credit (Form 1116) to reduce their U.S. tax liability. Careful tax planning, accurate reporting, and timely filing are essential to ensure compliance with both countries’ tax laws while optimizing overall tax outcomes.

Residency Determination

Residency determination under the U.S.–India Tax Treaty is crucial for establishing which country has primary taxing rights over an individual’s income. If a person qualifies as a resident of both countries, the treaty’s tie-breaker rules consider factors such as:

• Permanent home

• Center of vital interests

• Habitual abode

• Nationality

Proper residency classification ensures the correct application of tax benefits, prevents double taxation, and clarifies reporting obligations in both jurisdictions.

Exchange of Information

The U.S.–India Tax Treaty contains provisions that facilitate the exchange of information between the tax authorities of both nations to help prevent tax evasion and ensure adherence to tax laws. This information sharing allows authorities to verify the accuracy of reported income and tax liabilities, fostering greater transparency and enhancing enforcement efforts. To avoid penalties, taxpayers must ensure their filings meet the reporting requirements of both the U.S. and India.

Global Expansion Considerations

When expanding globally between the U.S. and India, understanding the U.S.–India Tax Treaty is essential to navigate cross-border tax challenges effectively. The treaty provides relief from double taxation, clarifies taxing rights, and offers reduced withholding rates on key income types. Leveraging these provisions helps businesses optimize tax strategies, minimize liabilities, and ensure smooth international operations.

It also facilitates the exchange of information between tax authorities, helping ensure compliance. By leveraging the treaty's provisions, businesses can optimize tax strategies, reduce tax liabilities, and ensure smooth operations in both countries.

Streamlined Procedures

The U.S.–India Tax Treaty offers simplified procedures for taxpayers to claim benefits, establish tax residency, and resolve tax disputes, reducing administrative complexities. Taxpayers can take advantage of streamlined forms and processes to claim:

• Tax exemptions

• Foreign tax credits

• Reduced withholding rates

The treaty also provides a Mutual Agreement Procedure (MAP) for resolving tax disputes, promoting efficient compliance, and reducing double taxation conflicts.

Transfer Pricing

The U.S.–India Tax Treaty tackles transfer pricing by adhering to OECD standards, ensuring that transactions between related parties are conducted on an arm’s length basis. It provides a framework for resolving disputes and preventing double taxation through the Mutual Agreement Procedure (MAP).

By setting clear guidelines for the allocation of income and expenses, the treaty assists businesses in complying with both U.S. and Indian tax regulations, reducing the risk of transfer pricing adjustments and promoting equitable taxation.

10 Tax Strategies for Maximizing Treaty Benefits 

1. Leverage Lower Withholding Rates: Use the treaty to reduce dividend, interest, and royalty withholding taxes—especially beneficial for cross-border licensing or financing.

2. Establish a Tax-Efficient Corporate Structure: Consider treaty provisions when setting up subsidiaries, branches, or holding companies.

3. Avoid PE Triggers: Structure activities in India or the U.S. to remain within treaty-safe harbor provisions and avoid triggering a PE.

4. Utilize MAP for Disputes: If facing double taxation or treaty interpretation issues, invoke the Mutual Agreement Procedure instead of litigation.

5. Claim Foreign Tax Credits Properly: Maximize your credits with the right documentation and carryback/forward planning.

6. Time Capital Gains Strategically: Structure exits or disposals to align with treaty benefits and domestic law exemptions.

7. Use Technical Fee Provisions: If you're in tech or consulting, ensure your services are properly classified for reduced rates under the treaty.

8. Document Tax Residency: Ensure residency is substantiated with a Tax Residency Certificate (TRC) to qualify for treaty benefits.

9. Structure Pensions and Retirement Income: Optimize taxation of U.S. pensions or Indian retirement funds using treaty rules.

10. Collaborate with Cross-Border Tax Advisors: Work with professionals (like H&CO) who understand both U.S. and Indian systems for optimal treaty usage.

Conclusion

The U.S.–India Income Tax Treaty is more than a legal framework—it's a strategic tool that facilitates international business, attracts investment, and ensures fair taxation. For businesses, it helps unlock global markets. For individuals, it secures income from punitive double taxation. And for both, it provides peace of mind.

At H&CO, we are proud to serve as trusted partners in your international journey. With our global expertise, personalized service, and unwavering commitment to your success, we help you navigate complexities and expand with confidence.

How Can We Help You?

At H&CO, our seasoned team of International Tax Advisors and CPAs is deeply experienced in the U.S.–India tax landscape. We understand that your success depends on more than compliance—it requires strategic tax planning, accurate execution, and a partner you can trust.

For over 30 years, we’ve helped businesses, investors, expatriates, and multinational families bridge tax systems between the U.S. and over 29 countries, including India. Whether you’re setting up a new venture, managing an international portfolio, or planning a cross-border merger, our experts are here to guide you. In addition, H&CO assists clients with offshore disclosure requirements, including specifically IRS offshore disclosure cases, to ensure full compliance with international tax laws.

With offices across the U.S. and in 29 countries, H&CO is your trusted partner in global tax compliance and international expansion. To learn more about our accounting firm services, take a look at our individual tax services, business tax services, international tax services, expatriate tax services, SAP Business One, entity management, human capital, and audit and assurance services.

FAQs

How do I claim tax treaty benefits as an Indian resident earning U.S. income?

As an Indian resident earning U.S. income, you can claim tax treaty benefits by submitting IRS Form W-8BEN (for individuals) or W-8BEN-E (for entities) to the U.S. payer before payment is made. You must also obtain a Tax Residency Certificate (TRC) from India and cite the relevant article of the U.S.–India tax treaty. This allows you to claim reduced withholding tax rates on income like interest, dividends, or royalties.

Can U.S. citizens in India benefit from the treaty?

No, U.S. citizens generally cannot benefit from the U.S.–India tax treaty for U.S. tax purposes due to the “savings clause” in the treaty, which allows the U.S. to tax its citizens as if the treaty didn’t exist. However, certain provisions (like foreign tax credits or mutual agreement procedures) may still offer limited relief.

What happens if I don’t file the treaty forms correctly?

Failure to properly file treaty forms may result in full 30 percent U.S. withholding on payments, IRS audits or penalties, and loss of eligibility for treaty benefits.

Is Form 8833 required to disclose treaty benefits?

Yes, in most cases where a treaty benefit overrides or modifies U.S. tax rules, Form 8833 must be filed.