The DTAA between India and the USA (the 1989 India-US income tax treaty) does not make income tax-free. It decides which country has first right to tax each type of income, caps India's tax on some items (for example 15% on most interest), and lets you credit tax paid in one country against tax on the same income in the other. In practice you pay roughly the higher of the two countries' taxes, not both. To use it you need a Tax Residency Certificate (TRC), Form 10F in India, Form 67 to claim credit in India and Form 1116 to claim credit in the US.
This guide covers the residency tie-breaker, how foreign tax credit works in both directions, treaty rates, the missing social security agreement, common NRI scenarios, a worked example and the mistakes that cost money. Rules are as of India's tax year 2026-27 and US tax year 2026.
Step 1: which country are you resident in?
Each country first applies its own law. India uses the day-count test (182 days, or 60 days plus 365 in the previous four years with variations for Indian citizens and PIOs, plus the "deemed resident" rule). You can check your status with our residential status calculator. The US uses citizenship, green card or the substantial presence test.
If both countries treat you as resident (common in the year you move), Article 4 of the treaty breaks the tie in this order:
- Permanent home: where you have a home available to you.
- Centre of vital interests: where your personal and economic ties are closer, such as family, job and assets.
- Habitual abode: where you usually live.
- Nationality.
- Mutual agreement between the two tax authorities.
Two caveats. First, the US "saving clause" (Article 1) lets the US tax its citizens, and generally green card holders, as if the treaty did not exist, apart from a few listed articles. A US citizen living in Bengaluru still files a full US return. Second, a green card holder who uses the tie-breaker to be treated as a non-resident of the US must disclose it (Form 8833), and this can have immigration and expatriation-tax consequences. Take advice before doing it.
Step 2: how foreign tax credit works both ways
The core relief is in Article 25. The country where you are resident taxes your worldwide income, then gives credit for tax the source country charged on the same income, up to the tax it would itself charge on that income.
US resident with Indian income: Form 1116
- You report Indian interest, rent, dividends and capital gains on your US return.
- You claim credit for Indian tax on Form 1116, separately for "passive" income (interest, dividends, most gains) and "general" income (salary).
- The credit is capped at the US tax on that foreign income. Unused credit can be carried back one year and forward ten.
- Only the tax you were legally required to pay under the treaty counts. If India deducted 31.2% when the treaty caps it at 15%, the IRS can deny credit for the extra, and you must claim that refund from India.
- Many US states do not give credit for foreign taxes. California is a well-known example, so Indian income can be taxed in full at state level.
Indian resident (or returning NRI) with US income: Form 67
- Once you are resident and ordinarily resident in India, your US income (salary, 401(k) withdrawals, US dividends and gains) is taxable in India.
- Claim credit for US tax under section 159 of the Income-tax Act, 2025 (formerly section 90 read with Rule 128) by filing Form 67 online, with proof of tax paid, before or along with your ITR. File it within the time Rule 128 allows. The rule was relaxed in 2022 so that it can be filed by the end of the assessment year for returns filed on time or belated. Missing it has led to credit being denied. (The Income-tax Act, 2025, in force from 1 April 2026, moves Section 90 to section 159 and renumbers the related rule and form, but the mechanism continues.)
- Indian financial year (April-March) and US calendar year do not match. Credit is apportioned across years, which is a frequent source of errors.
Treaty rates you will actually meet
| Income (paid from India to a US resident) | Treaty article | Maximum Indian rate under the treaty | Indian domestic TDS for NRIs | What applies |
|---|---|---|---|---|
| Interest (NRO FDs, bonds) | Art. 11 | 15% generally; 10% if the beneficial owner is a bank or financial institution | 30% plus surcharge and cess | Treaty 15%, with TRC and Form 10F |
| Dividends from Indian companies and MFs | Art. 10 | 15% for a company holding at least 10% of voting stock; 25% otherwise | 20% plus surcharge and cess | Domestic 20%, which is lower than the 25% treaty rate for individuals |
| Capital gains (shares, MFs, property) | Art. 13 | No cap; each country taxes under its own law | Equity LTCG 12.5% above ₹1.25 lakh, STCG 20%; property LTCG 12.5% without indexation | Indian domestic rates in full |
| Rent from Indian property | Art. 6 | No cap; India taxes as source country | TDS 30% plus surcharge and cess on rent paid to NRIs | Slab rates on filing ITR |
| NRE and FCNR interest | n/a | Exempt in India | Nil | US taxes in full, with no credit |
Treaty rates cap India's tax. They do not reduce US tax. Check the treaty text and current Indian rates before filing; surcharge and cess apply on domestic rates.
TRC and Form 41 (formerly Form 10F): the paperwork that unlocks treaty rates
- TRC: US residents get it from the IRS as Form 6166 by applying on Form 8802 (there is a user fee, and processing takes weeks, so apply early). It usually covers a calendar year.
- Form 10F: filed electronically on the Indian income tax portal each year, with details the TRC may not contain (status, TIN, period of residence, address). Electronic filing is mandatory for most people with a PAN.
- Give both to the payer (your bank for NRO interest, or the buyer or tenant where relevant) before the payment, so TDS is deducted at the treaty rate. If you are late, you can still claim the difference as a refund in your Indian ITR.
- If you claim treaty benefits in your Indian return, you generally need to have the TRC and Form 10F in place.
No social security totalisation agreement: what it means
India and the US have no social security totalisation agreement, despite years of negotiation. Consequences:
- Indians working in the US pay FICA (6.2% Social Security plus 1.45% Medicare, matched by the employer) with no exemption for short assignments.
- US Social Security retirement benefits need 40 credits (roughly 10 years of work). If you return to India earlier, you cannot combine Indian EPF years to qualify, and you generally cannot get the contributions refunded.
- US citizens (and other non-Indian passport holders) working for an Indian employer may fall under India's "international worker" EPF rules, which apply on full salary and restrict withdrawals.
- If you have 40 credits, US Social Security can be paid to you in India. Under Article 20 of the treaty, US social security benefits are taxable only in the US. Check the current IRS position for your case.
If you are planning a move back after, say, six US years, count these contributions as money spent, not a future pension, in your return-to-India plan. The FinPlann NRI plan puts both countries' retirement money in one place. For the corpus itself, see how much you need to retire in India as an NRI.
Common scenarios under the DTAA between India and the USA
| Scenario | India | US | How double tax is avoided |
|---|---|---|---|
| US-resident NRI earns NRO FD interest | Taxed; 15% treaty cap with TRC and 10F | Taxed at your bracket | Form 1116 credit for Indian tax |
| US-resident NRI sells Indian equity mutual funds | LTCG 12.5% above ₹1.25L or STCG 20%, TDS by the fund house | Taxed; Indian MFs are usually PFICs with punitive rules | Form 1116 credit; treaty re-sourcing may be needed. See PFIC tax on Indian MFs |
| US-resident NRI rents out a flat in India | Taxed at slab rates after 30% standard deduction; tenant deducts TDS | Taxed after US depreciation and expenses | Form 1116 credit |
| US-resident NRI sells a flat in India | LTCG 12.5% without indexation (the 20%-with-indexation option is for residents only) | Taxed as capital gain | Form 1116 credit. See selling property as an NRI |
| Returning NRI with RNOR status receives US salary for work done in the US before moving | Not taxed if earned and received outside India | Taxed | No overlap |
| Resident Indian (ROR) with US 401(k) withdrawals or US dividends | Taxed as worldwide income | Taxed at source (withholding) | Form 67 credit in India |
For the RNOR window and what stays outside Indian tax, read our RNOR guide.
Worked example: NRO interest for a US resident
Rahul lives in New Jersey and earns ₹3,00,000 of NRO FD interest in tax year 2026-27. Assume ₹85 to US$1, so the interest is about $3,529, and his US federal bracket is 24%.
| No TRC (31.2% TDS) | TRC and Form 10F (15% TDS) | |
|---|---|---|
| Indian TDS | ₹93,600 ($1,101) | ₹45,000 ($529) |
| US tax before credit (24%) | $847 | $847 |
| Foreign tax credit allowed | Capped at treaty tax, $529 | $529 |
| Net US tax | $318 | $318 |
| Total tax | $1,419 until he claims an Indian refund of about $572 | $847 |
With the right paperwork, Rahul's total tax is the US rate. Without it, he overpays in India and has to file an Indian ITR to get about ₹48,600 back.
A further point: if the NRO interest is his only Indian income, filing an Indian ITR at slab rates could make the Indian tax nil, since the new regime's nil slab covers the first ₹4 lakh. (Non-residents cannot claim the section 156 rebate, formerly Section 87A, but ₹3 lakh sits inside the nil slab.) He would then get all the TDS back and pay the full $847 in the US. The total is the same, $847, but none of his money is stuck in India. New Jersey state tax is extra and ignored here. These figures are illustrative.
Common mistakes
- Thinking the DTAA means "pay tax in only one country". You usually pay in both, and credit stops you paying twice.
- Not filing the foreign tax credit form on time (Form 67 for income up to FY 2025-26; Form 44 from tax year 2026-27) when claiming Indian credit for US tax. Credits have been denied for this.
- Claiming US credit for tax India should not have charged. Fix the Indian side with a refund claim instead.
- Expecting a credit for NRE interest. India charged no tax, so the US taxes it in full.
- Assuming the tie-breaker stops US tax for citizens. The saving clause keeps US citizens fully taxable.
- Ignoring PFIC rules on Indian mutual funds. The treaty does not fix PFIC treatment. Model it with the PFIC tax calculator.
- Forgetting reporting: FBAR (above $10,000 aggregate), Form 8938 and, in India, Schedule FA once you are ROR.
- Mixing up financial years. India is April-March and the US is January-December, so match the tax paid to the right year.
Bottom line
The DTAA between India and the USA works well if you do the paperwork: TRC and Form 10F before income is paid, Form 1116 in the US, and Form 67 in India once you are resident. Get it wrong and you end up paying 31.2% in India plus US tax with part of the credit denied. This is general information, not personal tax advice. Confirm your case with a CA and a US CPA who handle cross-border returns. To see how your India and US income, accounts and move-back timing fit together, start with our NRI planning hub. And if you are still setting up accounts, read NRE vs NRO accounts, the first step to getting treaty rates right.