Earn income across India and the United States (US), and the same profits can be taxed twice. Worse, most people cannot say which country gets to tax what. India taxes its residents on worldwide income. The US taxes at source and taxes its own citizens everywhere.
The India-US tax treaty, formally the Double Taxation Avoidance Agreement (DTAA), fixes this. It caps withholding tax rates, resolves dual residency, and grants a foreign tax credit so tax paid in one country offsets tax owed in the other. Read the full text in the IRS India tax treaty PDF.
What Is the India-US Tax Treaty (DTAA)?
The India-US DTAA is the bilateral income tax convention between the two countries. It was signed at New Delhi on September 12, 1989, entered into force on December 18, 1990, and took effect in the US from January 1, 1991 and in India from April 1, 1991, per Article 30 of the IRS treaty text.
| Core fact | Detail | Source |
|---|---|---|
| Official name | Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income | IRS treaty text |
| Signed | September 12, 1989, at New Delhi | US State Department |
| Entered into force | December 18, 1990 | US State Department |
| Effective in the US | January 1, 1991 (Article 30) | IRS treaty text |
| Effective in India | April 1, 1991 (Article 30) | IRS treaty text |
| Indian legal basis | Section 90, Income-tax Act, 1961; now Section 159, Income-tax Act, 2025 (from April 1, 2026) | incometaxindia.gov.in |
| US legal basis | IRC §894 (benefits); IRC §6114 (disclosure via Form 8833) | 26 U.S.C. §6114 |
| Protocol | One Protocol, signed the same day; no later amending protocol | IRS treaty documents |
India’s Income-tax Act, 2025 replaced the 1961 Act from April 1, 2026. Section 159 now empowers treaty relief, and Section 159 also lets a taxpayer apply the treaty where it is more beneficial than domestic law.
How Does the India-US Treaty Decide Tax Residency? (Article 4 Tie-Breaker)
When an individual is a resident of both countries under domestic law, Article 4(2) of the IRS treaty text applies a five-step tie-breaker in order: permanent home available, then centre of vital interests, then habitual abode, then nationality, and finally mutual agreement between the two competent authorities.
Each step runs only if the one before it fails to resolve residency. A dual-resident company falls outside the treaty’s main scope, and the competent authorities settle its status directly, per Article 4 of the IRS treaty text.
What Is a Permanent Establishment Under the Treaty? (Article 5)
A permanent establishment (PE) is a fixed place of business through which a company’s business is wholly or partly carried on. If a PE exists, the source country taxes the profits attributable to it under Article 7. With no PE, business profits are taxed only in the residence country, per the IRS treaty text.
| PE trigger | Threshold | Source |
|---|---|---|
| Fixed place of business (office, branch, factory, workshop) | No time test | IRS treaty text, Article 5(1)-(2) |
| Building, construction, installation, or assembly project | More than 120 days in any 12-month period | IRS treaty text, Article 5(2)(k) |
| Furnishing of services through employees or personnel | More than 90 days in any 12-month period | IRS treaty text, Article 5(2)(l) |
| Dependent agent habitually concluding contracts | No time test | IRS treaty text, Article 5(4) |
Preparatory or auxiliary activities do not create a PE. These include storage, display, purchasing, and information gathering, per Article 5 of the IRS treaty text.
Does a US Subsidiary Create a Permanent Establishment for Its Indian Parent?
No, not by itself. Article 5(6) of the IRS treaty text says a parent-subsidiary control relationship does not, on its own, make either company a PE of the other. So an Indian company can own a US subsidiary without automatically creating a taxable US presence for the parent.
The risk starts when the subsidiary acts as a dependent agent that habitually concludes contracts for the parent. It also rises when parent employees work from the subsidiary’s premises or arrive through secondment arrangements. Where a PE does arise, only the profits attributable to it are taxed under Article 7, measured at arm’s length. Commenda’s transfer pricing service documents that attribution.
How Does the Treaty Prevent Double Taxation? (Article 25)
Both countries use the credit method under Article 25 of the IRS treaty text. India allows its residents a credit against Indian tax for US income tax paid, capped at the Indian tax on that US-source income (Article 25(2)). The US allows its residents and citizens a credit against US tax for Indian income tax paid (Article 25(1)).
Neither country uses the exemption method here. Both tax the income, then credit the other country’s tax. The credit is limited to the home-country tax on that income, so a higher foreign rate is not fully refunded.
How Do You Claim the Foreign Tax Credit in the US and India?
US filers claim the foreign tax credit (FTC) on Form 1116 (individuals) or Form 1118 (corporations), subject to the IRC §904 limitation. Indian residents claim their FTC by filing Form 67 on the income tax e-portal, with proof of the foreign tax paid, before the return due date, per Rule 128 and Section 159.
On the US side, the credit cannot exceed the US tax on the foreign-source income. On the India side, Form 67 must accompany the return of income, and Rule 128 governs the documentation. Both directions require you to identify the treaty income and the tax actually paid.
What Are the India-US DTAA Withholding Tax Rates?
The treaty caps withholding at 15% or 25% on dividends, 15% (10% for banks and financial institutions) on interest, and 15% on royalties and fees for included services. That compares with the 30% default the US applies to such payments to foreign persons (IRS). Reduced rates require the recipient to be the beneficial owner.
| Income type | Article | Treaty rate cap | US domestic default | Source |
|---|---|---|---|---|
| Dividends, corporate owner holding 10%+ voting stock | Article 10 | 15% | 30% | IRS treaty text |
| Dividends, all other cases | Article 10 | 25% | 30% | IRS treaty text |
| Interest to banks and financial institutions | Article 11 | 10% | 30% | IRS treaty text |
| Interest, all other cases | Article 11 | 15% | 30% | IRS treaty text |
| Royalties and fees for included services (standard) | Article 12 | 15% | 30% | IRS treaty text |
| Royalties for use of industrial or scientific equipment | Article 12 | 10% | 30% | IRS treaty text |
Dividends (Article 10)
The rate is 15% if the beneficial owner is a company holding at least 10% of the voting stock of the payer, and 25% in all other cases, per Article 10(2) of the IRS treaty text. India abolished its Dividend Distribution Tax (DDT) in 2020 under the Finance Act, 2020. Dividends are now taxed in shareholders’ hands, and the treaty caps the withholding.
Interest (Article 11)
Interest is capped at 15% in general, and at 10% when it is paid on a loan granted by a bank or similar financial institution, per Article 11(2) of the IRS treaty text. Interest derived and beneficially owned by the government, the Reserve Bank of India, or the US Federal Reserve Banks is exempt under Article 11(3).
Royalties and Fees for Included Services (Article 12)
The standard rate is 15% of the gross amount for royalties and fees for included services (FIS), per Article 12(2) of the IRS treaty text. The higher first-five-year rates of 15% and 20% expired in 1995. Equipment-use royalties are capped at 10%. India’s domestic royalty rate can be lower, so Section 159 lets the taxpayer choose the lower of treaty or domestic rate.
FIS uses a “make available” test. A technical or consultancy service is FIS only if it transfers technical knowledge, skill, or know-how that the recipient can then apply independently, per Article 12(4) of the IRS treaty text.
How Does the Treaty Help Indian Software Companies With US Income?
Without a US PE, an Indian software company’s business profits from US customers are taxable only in India under Article 7. The treaty removes US corporate tax on those profits. This is the core planning point, and it turns on PE status, not on when income is repatriated.
Three cases show the mechanics:
- No US PE. Business profits are taxed only in India (Article 7). No US corporate tax applies to the service revenue.
- US PE exists. The US taxes the profits attributable to the PE at arm’s length. India then grants an FTC on the US tax under Article 25, claimed via Form 67.
- Royalty or FIS characterization. If a payment is a royalty or FIS, US withholding under Article 12 applies at the treaty cap regardless of PE. The “make available” test decides whether a technical service is FIS.
What Forms Do You Need to Claim Treaty Benefits?
You need four documents, depending on direction. Give the US payer Form W-8BEN or W-8BEN-E to claim reduced US withholding. To claim benefits in India, present a Tax Residency Certificate (TRC) with Form 10F. Disclose a US treaty position on Form 8833, and claim the Indian FTC on Form 67.
| Form | Who files it | What it does | Source |
|---|---|---|---|
| Form W-8BEN / W-8BEN-E | Indian individual / entity payee | Given to the US payer to claim the treaty-reduced withholding rate | IRS |
| TRC + Form 10F | Non-resident claiming benefits in India | Proves residence; Form 10F is filed on the Indian e-portal | Section 159, Income-tax Act, 2025 |
| Form 8833 | US filer taking a treaty position | Discloses a treaty-based return position under IRC §6114 | 26 U.S.C. §6114 |
| Form 67 | Indian resident claiming the FTC | Claims the foreign tax credit before the return due date | incometaxindia.gov.in |
Failure to disclose a treaty position on Form 8833 carries a penalty of $1,000 for individuals and $10,000 for a C corporation per position, under IRC §6114 and §6712.
What Is the Saving Clause in the India-US Treaty?
The saving clause, in Article 1 paragraphs 3 and 4 of the IRS treaty text, lets each country tax its own residents and citizens as if the treaty did not exist. Listed exceptions survive it, including the FTC under Article 25, non-discrimination under Article 26, and the Mutual Agreement Procedure under Article 27.
For a US citizen or green card holder living in India, the practical meaning is direct. The treaty does not shield them from US tax on worldwide income. They still file a US return, and they use the FTC to relieve double tax rather than an exemption.
What Are the Tax Treaty Benefits for NRIs?
Non-resident Indians (NRIs) get three benefits. Withholding on Indian dividends and royalties is capped at 15% (25% for smaller dividend holders), and interest to banks is capped at 10% under Articles 10 to 12. Residency is settled by the Article 4 tie-breaker. And the same income is relieved by an FTC under Article 25.
The practical gateway is documentation. An NRI resident in the US files a TRC (Form 6166, obtained via Form 8802) plus Form 10F to claim treaty benefits in India. Without that paperwork, the payer applies domestic withholding, not the treaty cap.
Can You Still Be Double Taxed Despite the Treaty?
Yes, in four situations. The treaty reduces double taxation but does not always eliminate it.
- FTC limitation. When the source-country rate exceeds the residence-country tax on that income, the credit is capped and residual double tax remains (Article 25).
- Fiscal-year mismatch. The US tax year is the calendar year, and the Indian fiscal year runs April to March, so credits can fall in different periods.
- Saving clause exposure. US citizens and residents stay taxable on worldwide income regardless of the treaty (Article 1).
- Dual-residency conflicts. An unresolved residency dispute can leave both countries taxing until the Mutual Agreement Procedure under Article 27 settles it.
How Commenda Helps With India-US Cross-Border Tax
Commenda handles the India-US treaty work end to end, so you can claim every benefit with certainty. Our corporate tax and bookkeeping service manages treaty positions, FTC filings such as Form 67 and Form 1116, and India-US compliance. Our transfer pricing service handles PE profit attribution and arm’s-length documentation under Article 7.
Standing up a US subsidiary? Our entity management platform runs the formation and keeps filings on track, and our compliance calendar tracks every deadline by entity and country.
Book a demo to get a free assessment of your India-US permanent establishment exposure at commenda.io/book-a-demo.
