DTAA Between India and USA - What Is the India USA DTAA?

What is DTAA?

The DTAA or Double Taxation Avoidance Agreement is a treaty signed between two countries to protect the interests of their respective citizens and to make the country an attractive destination for trade and investment.

While a DTAA ensures that the taxpayer does not have to pay taxes in both countries, it does not mean that NRIs can avoid taxes. In simple words, it saves the NRIs from paying taxes in both countries and eliminates the duplicity of paying taxes.

How Does DTAA Between India and USA Work?

Let’s understand how DTAA between India and the USA works with the help of an example -

Mr.Y, who is a resident of India, works in the USA and receives remuneration abroad. Now, the US government levies federal tax on income earned in the US.

This income is also taxable in India as remuneration earned abroad as Mr.Y is an Indian resident.

DTAA is an agreement that is aimed at protecting such people from paying tax on the same sum twice. The relief can be provided by either -

• Exempting the entire income earned in one country (Income earned in USA is exempt from tax in India)
• Providing credit for the amount of tax that has already been paid in the USA.

What are the Conditions for the Applicability of India USA DTAA?

DTAA between India and the USA is applicable to -

• Individual
• Company
• Partnership Firm
• Trust
• Any other entity having income in both countries.

DTAA covers the following types of taxes -

In USA: Federal income tax levied by the Internal Revenue Code in the USA

In India: Indian Income tax, including surtax and surcharge

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How is Residential Status Determined for DTAA Between India and the USA?

If an individual is a resident in both India and the USA, then the residential status will be determined as follows -

How is Different Income Tax Under DTAA Between India and USA?

Income from Immovable Property Under DTAA with USA

If a resident has income from any immovable property, he/she has to pay income tax in the country where this immovable property is located. It covers the following types of income -

• Income from letting out immovable property
• Income from agriculture or forestry
• Income from an immovable property being used to provide personal services
• Income earned by an enterprise from the immovable property.

Dividend Under DTAA between USA and India

If a resident company pays a dividend to another country’s residence, the earnings from the dividend are taxable in the receiving country.

Here’s an example - Suppose a US-based company pays a dividend to a shareholder residing in India, then such income will be taxable in India.

The dividend can also be taxed in the paying country if the taxpayer resides in the receiving country. In such a case, tax on dividends should not exceed -

• 15% of the gross amount if the dividend is received by a company having at least 10% of the company’s shares.
• 25% of the gross amount in any other cases.

Interest Income Under DTAA with USA

If interest income arising in a country is paid to a resident of another country, it is charged to tax in the country where the receiver resides. This income can also be taxed in the country where it arises, and the taxpayer is the receiving country’s resident, then the interest cannot be more than -

• 10% of the gross amount if the interest is paid on a loan from a bank or financial institution.
• 15% of the gross amount in other cases.

Payment Received by Teachers, Professors, Scholars

The income of a teacher, professor, or research scholar who moves to a different country is exempt from tax if they fulfill both the below conditions -

• They reside in the foreign country for not more than 2 years.
• If they are a resident of the previous country before shifting

What is the Relief from Double Taxation in DTAA Between India and USA?

• DTAA Relief in India
  If an Indian resident earns an income that is chargeable to tax in the USA, then such taxpayer can claim a deduction of the amount of tax paid in the USA. However, the total deduction claimed should not exceed the total tax payable on this foreign income in India.
• DTAA Relief in USA
  A resident of the USA can claim a credit against the US Tax amount of -
  
  • Income tax paid in India by the resident or on his behalf
  • Income tax received by the government of India from an Indian company on the dividend paid to a USA company holding 10% of the voting rights of the Indian company.

How to Report Income in ITR Under DTAA Between India and USA?

Non-residents in India are required to report their foreign income and foreign assets in ITR and pay tax on foreign income.

Schedule FSI (Foreign Source of Income)

In this section, taxpayers are required to report the income arising or accruing from any source outside of India. The taxpayers have to enter the following information -

• Country code
• Taxpayer Identification Number
• Income Earned Outside India
• Taxes Paid Outside India
• Tax Payable in India
• Tax Relief Available
• Relevant DTAA article for claiming relief

Schedule (Tax Relief)

As soon as the taxpayer enters details of income into the schedule FSI, the details under schedule TR get auto-populated, and the double taxation relief is reduced from the tax calculation.

Schedule FA (Foreign Assets)

If a taxpayer has foreign assets located outside India, they must be reported in the ITR under schedule FA.

Form 67

Form 67 is an income tax form crucial for claiming foreign tax credits. Form 67 contains the details of foreign income and the tax relief on it. Form 67 can be filed online on the income tax department’s website before filing ITR.

How to Apply for the India-US DTAA?

To benefit from the India-US Double Taxation Avoidance Agreement (DTAA), individuals or businesses must follow a clear process. Here’s a step-by-step guide to applying for DTAA benefits:

1. Understand Eligibility: Determine whether you qualify for benefits under the India-US DTAA. This typically applies to residents of either India or the US who earn income in the other country.
2. Choose the Correct Forms: Depending on your taxpayer status, you will need to fill out the appropriate tax forms:
   1. For Indian Residents: Complete Form 10F, which certifies your residency in India.
   2. For US Residents: Use Form W-8BEN (for individuals) or W-8BEN-E (for entities) to certify your US residency.
3. Gather Supporting Documentation: Prepare documents that establish your residency in your home country, such as tax residency certificates, identification, or proof of address.
4. Complete the Forms: Fill out the relevant forms accurately and completely. Errors or incomplete information could delay processing.
5. Submit the Forms: Submit the completed forms to the tax authorities of your home country or to the relevant authorities in the country where you earn income.
6. Maintain Records: Keep copies of all forms and supporting documents for your records.
7. Monitor Correspondence: Watch for any communication from tax authorities regarding your application. You may be asked to provide additional information or clarification.
   If you are uncertain about any aspect of the process, consider consulting with a tax professional who is knowledgeable about international tax law and the DTAA between India and the US.

How to Claim DTAA Benefits?

To claim DTAA (Double Taxation Avoidance Agreement) benefits, taxpayers must adhere to specific procedures to ensure compliance with the tax laws and regulations of both India and the United States. Here’s a detailed step-by-step guide to help individuals and businesses claim DTAA benefits effectively:

1. Determine the Applicable Tax Rate: Review the terms of the India-US DTAA to understand the tax rates and exemptions available for the type of income in question. This agreement outlines the tax rates for various types of income, such as dividends, interest, royalties, and capital gains.
2. Obtain a Tax Residency Certificate (TRC): Secure a TRC from the tax authorities in your country of residence (India or the US). This certificate verifies your tax residency status and is essential for claiming DTAA benefits.
3. Complete Required Forms: Depending on your residency status and the type of income you receive, complete the necessary forms:
   1. For Indian Residents: Fill out Form 10F to claim benefits under the DTAA.
   2. For US Residents: Fill out Form W-8BEN (for individuals) or W-8BEN-E (for entities).
4. Include DTAA Claim in Tax Return: When filing your tax return, mention your eligibility for DTAA benefits and declare the income subject to DTAA rates. Include the TRC and any other required documentation to support your claim.
5. Provide Documentation: Attach necessary documents to your tax return, such as the TRC, forms, and any other relevant paperwork that proves your eligibility for DTAA benefits.
6. Calculate Taxes According to DTAA: Calculate your taxes based on the applicable tax rates and exemptions outlined in the DTAA, rather than standard domestic rates.
7. Keep Records: Maintain copies of your TRC, forms, and any correspondence related to your DTAA claim. These records may be needed for verification or audit purposes.
8. Ensure Compliance with Tax Laws: Stay up-to-date with tax regulations and requirements in both countries to ensure full compliance while claiming DTAA benefits.

In a globalized economy where individuals and organizations are increasingly involved in international transactions, the India-USA DTAA is an indispensable tool to prevent double taxation and ensure you're not paying taxes twice on the same income.

If you are an individual earning foreign income, it is important to disclose your foreign assets and income and file an ITR. Given the complexity of the India-USA DTAA, it is common to have doubts. But don’t worry; you can always contact a tax expert for a resolution to all your queries. Consult Here.