A Guide to the US – India Tax Treaty for Nonresidents

Are you an Indian citizen working in the U.S. on an H-1B visa? Or a U.S. investor collecting dividends from Indian stocks? If so, you may be paying more tax than you need to.

When income crosses international borders, two countries can each claim the right to tax it, leading to double taxation. To prevent this issue, the U.S. and India signed the Convention for the Avoidance of Double Taxation in 1989, commonly called the US – India tax treaty or the US – India DTAA (Double Taxation Avoidance Agreement). 

For nonresidents (e.g., Indian citizens earning U.S.-source income, U.S. residents with income tied to India, international students), this treaty can reduce withholding rates, establish which country has the primary right to tax certain income types, and in some cases eliminate tax liability on some earnings altogether. In this guide, we’ll review the treaty’s most important provisions and how an experienced CPA can help.

What Is the US – India Tax Treaty?

The US – India tax treaty serves three core functions: 

• Prevent the same income from being taxed twice;
• Reduce opportunities for tax evasion by requiring information sharing between the two governments and; 
• Establish clear rules for which country gets to tax which type of income. 

Without these rules, a person earning income across both countries would struggle with competing claims from two separate tax authorities. 

What “Double Taxation” Means in Practice

Double taxation happens when two countries each impose income tax on the same earnings. An Indian resident receiving a salary from a U.S. employer for work performed remotely in India can run into this problem: India taxes that income because it’s earned by an Indian resident on Indian soil, while the U.S. may assert taxing rights because the payment originates from a U.S. company. 

A U.S. resident holding shares in Indian companies runs into the same problem from the other direction: India withholds tax on dividend payments, and the IRS requires that same income to be reported again on a U.S. return. In both cases, the taxpayer is compromised financially by two separate governments taxing the same dollars.

How the Treaty Resolves the Conflict

The treaty resolves these conflicts through three provisions:

1. It allocates primary taxing rights by designating one country as the primary taxer for each income category. 
2. It reduces withholding rates on passive income types like dividends, interest, and royalties, so the source country collects less before the income even reaches the recipient. 
3. It works alongside foreign tax credit rules in both countries, allowing taxes paid in one jurisdiction to offset liability in the other. 

Where the treaty grants an exemption or a reduced rate, those terms take precedence over the standard rules in the U.S. Internal Revenue Code or India’s Income Tax Act.

Determining Tax Residency Under the Treaty

Before any treaty provision can apply, both countries need to establish where a taxpayer actually resides for tax purposes. Residency determines which country has the primary right to tax your income, which exemptions you can claim, and whether the treaty’s tie-breaker rules come into play at all.

U.S. Tax Residency Rules

The IRS uses two tests to determine U.S. tax residency, and meeting either one makes you a U.S. resident alien for tax purposes. 

• Green Card Test: If you hold a lawful permanent resident card at any point during the calendar year, the IRS treats you as a U.S. resident for that entire year. 
• Substantial Presence Test: This one counts physical days in the country. You meet this test if you’ve been present in the U.S. for at least 31 days during the current year and a total of 183 days over the current and two preceding years.

If you don’t meet either test, you’re classified as a nonresident alien, which means you’re taxed only on U.S.-source income and are potentially eligible for treaty benefits.

Indian Tax Residency Rules

India’s Income Tax Act determines residency primarily on physical presence. You qualify as an Indian resident if you spend 182 days or more in India during the relevant tax year, which in India runs from April 1 to March 31. A secondary rule applies to Indian citizens and persons of Indian origin who visit India: if they spend 60 or more days in India during the year and 365 or more days over the preceding four years, they also qualify as residents. 

Those who don’t meet these thresholds are classified as Non-Resident Indians (NRIs), which limits India’s taxing rights largely to income earned or received in India. India also has a third category called Resident but Not Ordinarily Resident (RNOR), which applies in transitional situations and carries its own set of tax implications for foreign income.

Tie-Breaker Rules

A taxpayer can simultaneously qualify as a tax resident in both the U.S. and India under each country’s domestic rules, which creates a direct conflict. The treaty’s tie-breaker provisions in Article 4 resolve this by applying a sequential series of tests. 

The first test looks at where you have a permanent home. If you maintain a residence in both countries, the next test examines the center of vital interests, meaning the country with which your personal and economic ties are stronger. If that test is inconclusive, the tie-breaker moves to habitual abode, asking which country you live in more regularly. If the habitual abode is also ambiguous, nationality governs the outcome.

For example, an Indian citizen working in the U.S. on an H-1B visa (and who has been present long enough to meet the substantial presence test) would normally be classified as a U.S. resident alien. But if that same person maintains a permanent home in India and returns for extended periods, they may invoke the treaty’s tie-breaker rules to establish Indian residency for treaty purposes. 

Doing so allows them to claim treaty benefits as a nonresident of the U.S. rather than being taxed as a full resident alien. This election has to be disclosed to the IRS using Form 8833, as it dictates how all income is reported and taxed.

Key Treaty Provisions That Affect Nonresidents

The US – India treaty covers more than a dozen income categories, each with its own rules for which country taxes the income and at what rate. They include employment income, business profits, independent personal services, dividends, interest, royalties, fees for technical services, capital gains, and the student and trainee exemption. 

Employment Income (Dependent Personal Services)

Under Article 15 of the treaty, income from employment (what the treaty calls “dependent personal services”) is taxable in the country where the work is physically performed. An Indian citizen working in the U.S. on an H-1B visa, for example, pays U.S. income tax on wages earned for services rendered on U.S. soil, regardless of where the employer is headquartered or where the paycheck is deposited.

The treaty recognizes an exception for short-term assignments. If an Indian resident performs services in the U.S. for fewer than 183 days in a given tax year, the employer is not a U.S. resident or permanent establishment, and the remuneration is not borne by a U.S. permanent establishment, then those wages remain taxable only in India. All three conditions must be met simultaneously for the exception to apply. An Indian employee sent to the U.S. for a four-month product launch who is paid entirely by an Indian parent company and works for an Indian entity without a U.S. office can invoke this exception and avoid U.S. withholding on those earnings.

For L-1 visa holders and short-term assignees cycling between both countries, the 183-day count and the employer residency conditions call for careful tracking. If any one of the three conditions breaks, the exception disappears, and U.S. tax applies from the first day of U.S. service.

Business Profits

Article 7 of the treaty limits a country’s right to tax business profits to situations where the foreign company has a Permanent Establishment (PE) in that country. A PE is a fixed place of business through which a company carries out its operations, such as a – 

• Branch office
• Factory
• Construction site lasting more than 120 days
• Warehouse used for more than storage purposes

The dependent agent rule extends this concept further: if someone in the U.S. regularly concludes contracts on behalf of an Indian company, that activity can constitute a PE even without a physical office. An Indian software company whose U.S.-based sales representative regularly signs service agreements with American clients on the company’s behalf risks creating a PE, exposing the company’s U.S.-sourced profits to IRS taxation.

Remote work increased the risk of a PE classification. An Indian company employee working from a home office in the U.S. and actively conducting business on the company’s behalf may inadvertently create a taxable presence. Whether a home office rises to the level of a PE depends on the degree of control the company exercises over that space and the nature of the work being performed there.

Independent Personal Services

Article 14 covers self-employed professionals (e.g., consultants, attorneys, physicians, engineers, and independent IT contractors) whose services aren’t rendered under an employment contract. 

Unlike dependent ones, independent personal services are taxable in the source country only if the professional has a fixed base in that country, or if they’re present there for 183 days or more in the tax year. A consulting firm in India sending an independent contractor to a U.S. client site for 90 days, with no dedicated office space, can argue that neither threshold is met and that the income remains taxable only in India.

Dividends

The U.S. standard withholding rate on dividends paid to nonresidents is 30%. Under the US – India treaty, Article 10 reduces that rate to 25% for dividends paid by a U.S. company to an Indian resident. While a five-percentage-point reduction may seem modest, it represents real savings for investors receiving regular dividend income from U.S. stocks. To claim the reduced rate, the Indian resident must provide the U.S. paying agent with a completed Form W-8BEN establishing their treaty eligibility before the payment is made.

Interest Income

Article 11 of the treaty sets a reduced withholding rate of 15% on interest paid from the U.S. to an Indian resident, compared to the standard 30% nonresident withholding rate. Interest paid directly to the Indian government, the Reserve Bank of India, or certain approved financial institutions is exempt from U.S. withholding entirely. For individual investors earning interest from U.S. bank accounts or bonds, the 15% treaty rate applies automatically once the correct documentation is on file with the payer.

Royalties and Fees for Technical Services (FTS)

The FTS provision has major implications for IT professionals, software developers, and consultants. Article 12 covers royalties (payments for the use of intellectual property such as patents, trademarks, and copyrighted software) at a treaty withholding rate of 10% to 15%, depending on the category. But it goes further by explicitly covering fees for technical services, which are defined as payments for managerial, technical, or consultancy services.

This distinction separates the US – India treaty from many others. A U.S. company paying an Indian IT firm for software development, data processing, or technical consulting may create Indian tax exposure for the Indian service provider under the FTS provision, depending on where the services are performed and how Indian sourcing rules apply. Indian tax professionals advising U.S. companies with Indian vendors need to account for FTS exposure on every service contract, not just those involving patents or software licenses.

Capital Gains

Article 13 of the treaty follows a residence-based approach for most capital gains: the country where the seller resides generally has the right to tax gains from the sale of property. A U.S. resident selling shares in an Indian company, for instance, would pay U.S. capital gains tax on the profit, and India’s taxing right would be limited.

The main exception applies to immovable property like real estate. Gains from the sale of property located in one country can be taxed by that country regardless of where the seller resides. An Indian resident selling a commercial property in the U.S. would owe U.S. tax on that gain under both the treaty and the Foreign Investment in Real Property Tax Act (FIRPTA), which requires withholding of up to 15% of the gross sale price at closing. The treaty doesn’t override FIRPTA, so Indian residents selling U.S. real estate face U.S. tax obligations regardless of their residency status.

Students and Trainees

Article 21 of the treaty has a targeted exemption for Indian students and apprentices studying or training in the U.S. Payments received from outside the U.S. for the purpose of maintenance, education, or training (such as scholarships, stipends, or remittances from family in India) are exempt from U.S. income tax for the duration of the student’s stay, provided the payments originate from non-U.S. sources.

An Indian student on an F-1 visa receiving a scholarship from an Indian university or a stipend funded by an Indian government program can claim this exemption to avoid U.S. tax on those funds. The exemption does not cover wages earned from on-campus employment or Optional Practical Training (OPT) income, which remains taxable in the U.S. To claim the Article 21 exemption, the student must file Form 1040-NR and attach Form 8833 disclosing the treaty position.

How to Claim Treaty Benefits

Knowing which treaty provisions apply to you is only half the equation. The IRS has specific filing requirements for claiming treaty benefits, and failing to follow them correctly can result in denied exemptions, unexpected withholding, or penalties for nondisclosure. 

Filing Requirements

Nonresident aliens reporting U.S. income use Form 1040-NR, the U.S. Nonresident Alien Income Tax Return. Form 8833, the Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), is required any time a taxpayer asserts that a treaty overrides or modifies a provision of the Internal Revenue Code. 

For example, if you’re claiming an exemption under Article 21 as a student, asserting that your employment income isn’t taxable in the U.S. under the 183-day exception, or invoking tie-breaker rules to establish non-U.S. residency, Form 8833 must be attached to your return. The form requires you to identify the treaty, cite the relevant article, and explain the tax treatment you’re claiming. Failure to file Form 8833 when required carries a $1,000 penalty per return.

Form W-8BEN, the Certificate of Foreign Status of Beneficial Owner, doesn’t get filed with the IRS directly: it goes to the U.S. payer of income, such as a brokerage, bank, or employer. By submitting a completed W-8BEN, the recipient certifies their foreign status and treaty eligibility, which instructs the payer to apply the reduced treaty withholding rate rather than the standard 30%. W-8BEN must be updated every three years or whenever your circumstances change in a way that affects your treaty eligibility.

Employer Withholding Adjustments

For employees, treaty benefits don’t apply automatically at the payroll level. A nonresident alien employee who qualifies for a treaty-based exemption needs to notify their employer and provide a Form W-8BEN or, in some cases, a statement of treaty position. The employer can then adjust federal income tax withholding accordingly. 

Interaction with Foreign Tax Credits

The US – India treaty reduces or eliminates double taxation in many situations, but it doesn’t always wipe it out entirely. When treaty provisions reduce (rather than eliminate) the tax owed in one country, foreign tax credits step in to handle what’s left. 

In the U.S., the foreign tax credit, which is claimed on Form 1116, allows U.S. taxpayers to offset their IRS liability by the amount of income tax paid to a foreign government. The credit is limited to the U.S. tax attributable to the foreign income: it can reduce your U.S. bill to zero on that income, but it can’t generate a refund beyond what you owed.

India has a similar arrangement under Section 90 of the Income Tax Act, which allows Indian residents to claim credit for U.S. taxes paid on income that’s also taxed in India. For example, an Indian resident who paid U.S. withholding tax on interest from a U.S. bond can credit that amount against their Indian tax liability on the same income.

In most cases, taxpayers don’t choose between a treaty rate and a foreign tax credit; the treaty first determines how much tax the source country may impose, and then the residence country allows a credit for taxes actually paid. Consider an Indian resident earning U.S. royalties subject to a 15% U.S. treaty withholding rate. If their Indian tax rate on that income is 30%, they’d owe an additional 15% to India after crediting the U.S. tax paid, resulting in a combined effective rate of 30%. 

In this scenario, the foreign tax credit handles the residual liability. But if the taxpayer could instead qualify for a full treaty exemption from U.S. withholding, no U.S. tax would be paid in the first place, and the full 30% would be owed to India with no offset available. In most residence-based systems, the overall effective tax rate generally equals the higher of the two countries’ applicable rates. Which approach produces a lower total tax bill depends on the income type, the applicable treaty rate, and the taxpayer’s Indian marginal rate.

Common Scenarios for Nonresidents

The five scenarios below represent the income arrangements most common among Indian nationals with U.S. tax exposure and U.S. residents with Indian-source income.

Scenario 1: Indian Software Engineer on H-1B

Ravi is an Indian citizen working full-time in the U.S. on an H-1B visa. He has been in the U.S. for more than 183 days and meets the substantial presence test, making him a U.S. resident alien for tax purposes. His U.S. wages are fully taxable by the IRS, and he files Form 1040 reporting his worldwide income. 

Because he’s classified as a U.S. resident alien, he can’t claim treaty-based exemptions designed for Indian residents on his U.S. wages. If he also has interest income from an Indian savings account, he reports that on his U.S. return and can claim a foreign tax credit using Form 1116 for any Indian tax withheld on that interest.

Scenario 2: Indian Student on F-1 with Internship Income

Priya is an Indian citizen studying at a U.S. university on an F-1 visa. She receives a scholarship funded entirely by an Indian government program, and also earns wages from a paid internship through her university’s Optional Practical Training authorization. 

The scholarship is exempt from U.S. tax under Article 21 of the treaty because she received it while temporarily in the U.S. for education, and the funds arise from sources outside the United States. She claims this exemption on Form 1040-NR with Form 8833 attached. Her OPT wages, however, are compensation for services performed in the U.S. and are fully taxable by the IRS, as Article 21 doesn’t extend to earned income.

Scenario 3: Indian Freelancer Providing Services to a U.S. Company

Arjun is an independent IT consultant based in India who provides software development services to a U.S. technology company under a contract. He performs all of his work from his office in Bengaluru and has no fixed base in the U.S. He’s present in the U.S. for fewer than 183 days in the year. 

Under Article 14, his consulting income is taxable only in India because he has neither a fixed base in the U.S. nor meets the day-count threshold. The U.S. company should not withhold U.S. tax on his payments once he provides a completed Form W-8BEN certifying his status. He reports the income to Indian tax authorities and pays tax there at the applicable rate.

Scenario 4: U.S. Resident Earning Rental Income in India

Sandra is a U.S. citizen living in Chicago who owns a residential apartment in Mumbai. India taxes that rental income because the property sits on Indian soil, withholding tax at the applicable NRI rate. Sandra also reports the rental income on her U.S. Form 1040 because U.S. citizens and residents owe tax on worldwide income. 

She uses Form 1116 to claim a foreign tax credit for the Indian tax paid, reducing her U.S. liability on that income by the amount already paid to India. If the Indian tax rate on her rental income exceeds her U.S. rate, she won’t owe additional U.S. tax on it, but any unused foreign tax credit may generally be carried back one year and forward up to ten years (subject to the foreign tax credit limits).

Scenario 5: Indian Investor Earning U.S. Dividends

Meena is an Indian resident who holds a portfolio of U.S. stocks through a U.S. brokerage account. When those companies pay dividends, the brokerage withholds U.S. tax at the standard 30% nonresident rate unless Meena has submitted a valid Form W-8BEN claiming the treaty-reduced rate of 25% under Article 10. With the form on file, withholding drops to 25%. She then reports the dividend income on her Indian tax return and claims a credit for the 25% U.S. tax withheld, offsetting a portion of her Indian tax liability on the same income.

When You Should Seek Professional Tax Advice

The US – India treaty covers enough ground that many straightforward situations, such as an F-1 student claiming an Article 21 exemption, can be handled yourself. But certain situations involve enough variables and financial risk that working with a cross-border tax professional is strongly recommended.

• Dual Residency Cases: When a taxpayer qualifies as a resident under both U.S. and Indian domestic rules, the treaty’s tie-breaker provisions affect how all income is classified, reported, and taxed across both returns. Getting the tie-breaker analysis wrong (or failing to file Form 8833 disclosing the election) can result in penalties, unexpected tax liability, or a disputed residency classification.
• Permanent Establishment Risk: An Indian company expanding into the U.S. market through employees, agents, or remote workers needs to assess whether those activities create a taxable U.S. presence before the arrangement is put in place, not after. Getting the PE analysis right from the outset is far less disruptive than addressing a retroactive determination once the IRS has raised it.
• Large Capital Gains Transactions: The sale of U.S. real estate by Indian residents, or the disposal of shareholdings in companies with assets tied to either country, involves treaty provisions, FIRPTA obligations, and Indian capital gains rules. A miscalculation at the transaction stage can’t easily be corrected once the sale has closed.
• Cross-Border Business Operations: Business owners running operations that span both countries have ongoing obligations across payroll, PE risk, transfer pricing, and entity-level taxation. The treaty provides guidelines, but applying them correctly can require professional input.
• Frequent Travel Between the U.S. and India: Those who stay in both countries throughout the year need to track their day counts carefully against both the substantial presence test and India’s 182-day rule. An unexpected shift in residency classification mid-year can change the tax treatment of every income stream for that entire year.

A qualified cross-border tax professional can assess your residency status, identify which treaty provisions apply to your income, prepare the required forms accurately, and flag risks before they become IRS notices. 

Need Assistance With Cross-Border Taxation? 

The US – India tax treaty has been in force for more than three decades. Its provisions cover employment wages, business profits, dividends, royalties, student exemptions, and capital gains, each with its own conditions, rates, and filing requirements that vary by income type and residency classification. 

At USA Tax Gurus, we work with Indian nationals, NRIs, H-1B holders, students, and cross-border business owners to evaluate treaty eligibility, establish correct residency classifications, and file accurately across both jurisdictions. Schedule a consultation today to review your position and determine the right approach. To get started, please fill out a contact form or call 213-204-8737 today.