How the U.S. India Tax Treaty Can Help You Avoid Double Taxation

Paying Tax Twice? You Might Not Have To

Many Indian nationals living in the U.S. are shocked to find they owe tax on the same income in both countries India and the United States.

Whether it’s salary earned in India, dividends from Indian companies, or rent from a property in Delhi the U.S. taxes your worldwide income. But so does India, if you’re still earning there.

The good news? The U.S. India Tax Treaty is designed to prevent this very problem.

At Kewal Krishan & Co, we help clients apply the tax treaty effectively, claim foreign tax credits, and legally avoid double taxation often saving thousands in unnecessary tax payments.

What Is the U.S. India Tax Treaty?

The U.S. India Income Tax Treaty was signed in 1989 and revised through protocols. It allows residents of both countries to avoid double taxation on the same income and clarify which country has taxing rights.

The treaty outlines:

• Taxation rights for various types of income (dividends, interest, royalties, salary, etc.)
• Relief methods like Foreign Tax Credit (FTC) and exemptions
• Tie-breaker rules to resolve dual residency cases
• Rules on Permanent Establishment (PE) for businesses

Key IRC Code Reference

Under IRC §901, U.S. taxpayers can claim Foreign Tax Credits for taxes paid to another country (India). The U.S. India Treaty enhances this relief by offering protection for specific income types.

Examples of How the Treaty Helps

Indian Salary Earned Before Moving to U.S.

Scenario: Ravi moved to the U.S. on H-1B in September 2025. He earned ₹12 lakhs ($14,500) in India Jan Aug.

Result:

• Since he was a U.S. tax resident from Sep 2025, only post-move income is taxable in U.S.
• Treaty Article 16 + FTC ensure India-taxed income is excluded or credited

Indian Bank Interest (TDS Paid)

Scenario: Meera earned ₹1.2 lakh ($1,400) in FD interest. India deducted 30% TDS.

Result:

• U.S. taxes the $1,400 as ordinary income
• But Meera gets a Foreign Tax Credit for 30% TDS under Article 11

3. Rental Income from Indian Property

• Report income in U.S.
• Claim depreciation and property expenses
• Apply Indian tax as credit on Form 1116

Forms You Need to Use

Key Treaty Articles You Should Know

Step-by-Step Guide to Avoid Double Taxation

1. Determine Residency using IRS rules + Substantial Presence Test
2. List all foreign income: salary, rent, interest, dividends, etc.
3. Match income with treaty articles to determine U.S. taxation
4. Apply Indian tax paid as a credit using Form 1116
5. Disclose treaty use (Form 8833) if you take any treaty-based exemption
6. Track INR-to-USD conversion using IRS yearly average FX rate
7. Maintain Form 16, TDS slips, 26AS for Indian taxes paid
8. Consult a cross-border tax CPA to structure your return properly

Common Mistakes to Avoid

• Using treaty without filing Form 8833
• Claiming Foreign Earned Income Exclusion (FEIE) for Indian salary (not allowed for U.S. residents)
• Not applying Foreign Tax Credit on interest/dividends taxed in India
• Overlooking dual residency and not applying tie-breaker rules

Conclusion

If you’re an Indian national living in the U.S., the U.S. India Tax Treaty can be your best friend in cutting your tax bill in half or more. But misusing the treaty, or failing to file the proper forms, can result in IRS penalties or audits.

Let Kewal Krishan & Co help you apply the treaty accurately, claim the right credits, and avoid paying twice on the same income.

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States, enrolled to practice before the IRS, and an expert in cross-border tax for Indian residents in the U.S. He regularly assists clients with foreign income reporting, Form 1116, FBAR, Form 8938, and IRS audits.

Disclaimer

This blog is intended for general informational purposes and does not constitute legal or tax advice. Please consult a qualified tax professional to evaluate your specific situation.

FAQs

1. Do I need to file Form 8833 for claiming tax credits?
Not usually. Form 8833 is only needed if you’re taking a treaty-based position, like excluding income.

2. Is TDS paid in India eligible for a U.S. tax credit?
Yes, if you are a U.S. tax resident and the income is also taxed in the U.S., use Form 1116.

3. Can the treaty help me if I am a dual resident (U.S. and India)?
Yes, the treaty has tie-breaker rules under Article 4 to resolve dual residency issues.

4. Do I still need to file FBAR if I report income under the treaty?
Yes. The treaty doesn’t eliminate reporting obligations like FBAR or FATCA.

5. Does the treaty reduce tax on dividends or interest?
It can. Article 10 (Dividends) and Article 11 (Interest) allow reduced withholding rates.