DTAA Between India and USA: Withholding Rates, TRC, and Form 10F

The DTAA between India and USA is a bilateral tax treaty, signed in New Delhi on September 12, 1989, and generally effective from January 1, 1991, that stops the same income from being taxed twice by both countries. It does this by assigning taxing rights between the two governments, capping withholding rates on cross-border dividends, interest, and royalties, and giving you a mechanism to credit tax paid in one country against liability in the other.¹ The relief is not automatic. You claim it with specific paperwork, and the wrong assumptions here tend to be expensive.

What Income the Treaty Covers

The treaty applies to residents of the United States, India, or both, and “person” is defined broadly enough to include individuals, estates, trusts, partnerships, and companies.² On the US side it covers federal income taxes under the Internal Revenue Code but excludes social security taxes, the accumulated earnings tax, and the personal holding company tax.¹ On the Indian side it covers income tax and surcharges under the Income-tax Act. Any substantially similar tax either country enacts in the future is automatically covered too.

One gap matters for workers on assignment. The treaty does not cover social security contributions, and the US and India have never signed a Totalization Agreement, so an Indian national on an H-1B in the US pays into US Social Security and Medicare through payroll while potentially still owing provident fund contributions in India.³ There is currently no treaty mechanism to offset that overlap.

The Saving Clause: Why US Citizens Get Less Than They Expect

Article 1, paragraph 3 preserves each country’s right to tax its own residents and citizens as though the treaty did not exist.² If you are a US citizen or green card holder, the United States taxes your worldwide income under its normal rules regardless of what the treaty says. Most of the treaty’s reduced rates and exemptions actually help the other side of the transaction: an Indian resident receiving US-sourced income, or a US resident (not a US citizen) receiving Indian-sourced income.

Even under the saving clause, US citizens can still rely on:

Foreign tax credits for income taxes paid to India
Certain pension benefits under Articles 19 and 20
Student and teacher exemptions under Articles 21 and 22
Social security benefits under Article 20(2)

When you use any of these carve-outs, you must file Form 8833 with your US return to disclose the treaty-based position. Skipping it triggers a penalty of $1,000 for individuals or $10,000 for C corporations.⁴

Which Country Counts You as a Resident

Every treaty claim starts with one definitive country of tax residence. India uses a physical presence test; the US uses both physical presence and citizenship. When both countries claim you, Article 4’s tie-breakers apply in order:

Permanent home. Whichever country has a home permanently available to you wins. If both do, move on.
Center of vital interests. Where are your closer personal and economic ties, considering employment, family, bank accounts, and social connections?
Habitual abode. Where do you actually spend more of your time? Travel records matter here.
Nationality. If the earlier tests are inconclusive, citizenship decides.

If none of these produces a clear answer, the tax authorities of both countries have to settle it by mutual agreement.¹ For companies there is no tie-breaker at all. A US-incorporated entity that is managed and controlled from India can be treated as resident in both countries with no automatic resolution.

Reduced Withholding Rates on Dividends, Interest, and Royalties

The treaty’s most practical benefit is capping the source country’s tax on passive income. Without it, domestic rates apply in full, meaning up to 30% US withholding on payments to an Indian resident.⁵

Dividends (Article 10)

15% if the recipient is a company that owns at least 10% of the voting stock of the payer
25% in all other cases¹

Interest (Article 11)

10% on interest paid on a loan from a bank, insurance company, or similar financial institution
15% in all other cases¹

Interest paid to a government, central bank, or certain government-backed financial institutions can qualify for full exemption depending on the nature of the debt.

Royalties and Fees for Included Services (Article 12)

Article 12 covers both royalties (payments for copyrights, patents, trademarks, and similar intellectual property) and “fees for included services,” a category somewhat unique to this treaty.⁶ The rates:

15% on royalties for copyrights, patents, and similar intellectual property, and on fees for included services
10% on royalties for the use of industrial, commercial, or scientific equipment

A payment qualifies as a “fee for included services” only if the service “makes available” technical knowledge, skill, or know-how, meaning the recipient could apply that knowledge independently afterward.¹ Hiring someone to perform a technical task does not count. If a US engineering firm designs a bridge and hands over the blueprints, the client has received transferable know-how. If the same firm just inspects the bridge each year, nothing was made available and the payment falls outside Article 12.

Business Profits and Permanent Establishment

Under Article 7, a company’s profits are taxable only in its home country unless it operates through a “permanent establishment” (PE) in the other country.¹ No PE, no business-profits tax in the other country. Article 5 defines a PE as a fixed place of business and includes branches, offices, factories, warehouses, sales outlets, and natural resource extraction sites. It also creates time-based PEs:

Construction or installation projects lasting more than 120 days in any 12-month period
Service activities (other than “included services” under Article 12) performed through employees in the other country for more than 90 days in any 12-month period, or for any duration if performed for a related company

Companies moving employees across the two countries need to count days carefully. Crossing either threshold creates filing obligations and exposes profits attributable to that activity to tax in the host country.

Capital Gains, Real Estate, and Pensions

Article 13 does not override each country’s domestic capital gains rules, with narrow exceptions for shipping and air transport.¹ A US resident selling property or shares in India will be taxed by India under Indian law and by the US as part of worldwide income. Relief comes through a foreign tax credit, not a treaty exemption. Article 6 gives the primary taxing right on rental, agricultural, and forestry income to the country where the property sits, again with the other country crediting the tax on the same income.

Private pensions and annuities under Article 20 are taxable only in the country where the recipient lives. A private US pension drawn by a retiree in India is taxable only in India; an Indian pension drawn in the US is taxable only in the US.¹ Social security follows a different rule: under Article 20(2), those payments are taxable only in the country that pays them, so US Social Security paid to someone living in India stays taxable in the US. Government pensions under Article 19 are generally taxable by the government that pays them, unless the recipient is both a resident and national of the other country.

Indian Employee Provident Fund (EPF) withdrawals sit in a gray zone. Whether they count as a pension under Article 20 or as social security under Article 20(2) is unsettled, and US residents drawing on an EPF should expect the IRS to treat at least the interest and growth as taxable.

Students and Teachers

Article 21 exempts a student or business trainee temporarily in the US from US tax on payments received from sources outside the US for maintenance, education, or training. Scholarships from Indian sources and family remittances for living expenses fall inside this.

Article 22 exempts a resident of one country visiting the other to teach or conduct research at a university or similar institution for up to two years. The catch is unusual: overstaying the two years costs you the exemption retroactively for the entire stay, not just the excess.⁷ A professor who stays 25 months owes tax going back to month one. Most treaties do not work this way, which is precisely why people miss it.

Paperwork You Need to Claim the Benefit

No document, no reduced rate. The payer will withhold at the full domestic rate unless your treaty paperwork is on file.

Tax Residency Certificate

Every treaty claim rests on a Tax Residency Certificate showing you are a tax resident of the other country. US residents file Form 8802 with the IRS and receive Form 6166 as the official certificate.⁸ Indian residents apply through the Income Tax Department’s e-filing portal.

Form 10F

Non-residents earning income from India must also file Form 10F, which captures nationality, tax identification number, residency period, and the treaty article being invoked. India requires this to be filed electronically.⁹

Form W-8BEN

Indian residents receiving US-source income give the US payer Form W-8BEN (individuals) or W-8BEN-E (entities). The form has a section for identifying the treaty article and the withholding rate claimed.¹⁰

Tax IDs on Both Sides

In the US, that means a Social Security Number or an Individual Taxpayer Identification Number (ITIN) obtained on Form W-7.¹¹ In India you need a Permanent Account Number (PAN), and skipping it is costly: under Section 206AA of the Income Tax Act, if you fail to furnish a PAN, the payer must withhold at the rate specified, the rate in force, or 20%, whichever is highest.¹² That 20% floor overrides the treaty rate, so no PAN means no treaty benefit.

How to Actually Claim Relief

Before Payment

Give the withholding agent your TRC, Form 10F or W-8BEN, and PAN before payment is made. That gets the correct treaty rate applied at source instead of forcing you to chase a refund later.

On Your Annual Return

After year-end you still report the income and take credit for the other country’s tax. US taxpayers file Form 1116 with Form 1040 to claim the foreign tax credit for Indian taxes paid; the credit is capped at the US tax on that foreign income, so it prevents double taxation without producing a windfall.¹³ Indian taxpayers claim relief under Section 90 of the Income Tax Act, which lets you apply whichever is more favorable, the treaty or domestic law.¹⁴ You are not stuck with the treaty if the domestic rule treats you better.

Form 8833

Any US return that takes a position that a treaty overrides or modifies the Internal Revenue Code must include Form 8833 disclosing the article and how it affects the return.¹⁵ Common triggers include a reduced withholding rate on Indian royalties, teaching income excluded under Article 22, or an argument that business profits are outside US tax because there is no PE. The $1,000 penalty applies per failure.

What the Treaty Does Not Cover: Account Reporting

The treaty covers income taxation. It says nothing about account reporting, and this is where the largest penalties live. US persons with financial accounts in India totaling more than $10,000 at any point during the year must file the FBAR (FinCEN Form 114) by April 15, with an automatic extension to October 15.¹⁶ Indian bank accounts, NRE and NRO accounts, PPF accounts, fixed deposits, and mutual funds all count toward the threshold. FATCA adds a separate reporting regime on Form 8938 at higher thresholds. FBAR and FATCA are not interchangeable, and filing one does not excuse the other. Indian residents with US accounts face a parallel set of disclosure rules under India’s Black Money Act. Both tax authorities exchange financial information under the treaty, so unreported foreign accounts are progressively harder to keep quiet.

1
Internal Revenue Service. Tax Convention with the Republic of India
2
United States Department of State. Convention Between the United States of America and India for the Avoidance of Double Taxation
3
Social Security Administration. U.S. International Social Security Agreements
4
Internal Revenue Service. Form 8833, Treaty-Based Return Position Disclosure
5
Embassy of India, Washington, D.C. Tax Rates as per IT Act vis a vis Indo-US DTAA
6
National Academy of Direct Taxes. India US Double Taxation Avoidance Treaty
7
Internal Revenue Service. Examining Treaty Exemptions of Income – NRA Students, Trainees, Teachers and Researchers
8
Internal Revenue Service. Form 6166 – Certification of U.S. Tax Residency
9
Income Tax Department. Notification No. DGIT(S)-ADG(S)-3 – e-Filing Notification for Form 10F
10
Internal Revenue Service. About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)
11
Internal Revenue Service. Individual Taxpayer Identification Number
12
Income Tax Department. Higher Deduction of Tax at Source in Certain Cases (Section 206AA and Section 206AB)
13
Internal Revenue Service. Foreign Tax Credit
14
Income Tax Department. Double Taxation Relief
15
Internal Revenue Service. About Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
16
Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)