- Applicability of DTAA between India and USA
- Residential Status
- DTAA between India and USA – Tax on Income
- DTAA between India and USA – Tax Relief
- DTAA between India and USA – Reporting in ITR
In the case of a Non-Resident Indian (NRI), income earned outside India is not taxable. If a resident has income earned outside India, it is taxable in India and must be reported in ITR. In most cases, the foreign country also imposes a tax on such foreign income. To avoid the same income getting taxed in two different countries, the taxpayer can avail the benefit of DTAA. Double Taxation Avoidance Agreement is an agreement between two countries to avoid double taxation for the taxpayer. Under this article, we shall read more about the DTAA between India and the USA to avoid double taxation in India and USA.
Rahul, a resident of India works in the USA and pays Federal Income Tax levied by the USA government. Since he is a resident in India, such foreign income would be taxable in India too. To avoid double taxation of the same income in two different countries, India has entered into DTAA with USA.
The government of both countries entered into a DTAA with the intention of providing either of the following:
- Exemption of income earned outside India
- Providing credit of tax paid on foreign income in the foreign country
Applicability of DTAA between India and USA
DTAA between India and USA is applicable to individual, trust, partnership firm, company or other entity having income in both countries. The DTAA covers the following taxes:
- Federal Income Tax imposed by Internal Revenue Code in the USA i.e. the USA Income Tax.
- Income Tax in India including surcharge and surtax.
For any taxpayer having source of income in two countries, it is important to determine residential status in each country.
A resident is a person who as per the relevant law of each country is liable to pay tax because of residence, citizenship, domicile, place of management, place of incorporation, or similar criteria. If a taxpayer is a resident of both the countries i.e. India & USA, residence should be determined as follows:
- The taxpayer would be a resident of the country in which a permanent home is available. If there is a permanent home at both places, taxpayer would be resident of the country in which their personal and economic relations are closer.
- If the taxpayer does not have a permanent home in either of the countries, the taxpayer would be a resident of the country in which he/she has the habitual abode.
- In case, the taxpayer has a habitual abode in both the countries or neither of them, the taxpayer would be a resident of the country in which he/she is a national.
- If the taxpayer is a national in both the countries or neither of them, the competent authority of both countries would mutually decide the residential status.
DTAA between India and USA – Tax on Income
Income from Immovable Property
If a resident has earned income from immovable property, they should pay tax in the country in which such immovable property is located. Following are the types of income from immovable property:
- Income from let out of immovable property
- Agricultural or forestry income
- Income from immovable property used to perform independent personal services
- Income of an enterprise from immovable property
If a resident company pays a dividend to a resident of another country, the dividend income is taxable in the country in which it is received.
For example: If a US company pays a dividend to a shareholder who is an Indian resident, such a dividend would be taxable in India.
However, the dividend may also be taxed in the paying country and if the taxpayer is a resident of receiving country, then the tax on the dividend cannot exceed the following:
- 15% of the gross amount – If the dividend recipient is a company that owns at least 10% of the voting stock of the company paying the dividend
- 25% of the gross amount – in any other case
For example: The dividend paid by an Indian company to a USA resident is taxable in the USA. If such dividend is received in India, it is taxable in India too. However, the tax on such dividends should not exceed the above-specified limits.
If interest income arises in a country and is paid to a resident of another country, it is taxable in the country in which the receiver is a resident.
For example: If a US resident earns interest income in India, it is taxable in the USA.
However, the interest may also be taxed in the country in which it arises and if the taxpayer is a resident of receiving country, then the tax on the dividend cannot exceed the following:
- 10% of the gross amount – If the interest is paid on a loan granted by a bank or a financial institution.
- 15% of the gross amount – in any other case.
For example: If such interest income is taxable in India also, then the tax in India should not exceed the above-mentioned limits.
Income of professors, teachers, and research scholars
The income of a professor, teacher or research scholar who moves to another country is exempt from tax if they fulfill the following conditions:
- The engagement is for a period not exceeding two years, AND
- Before the visit, the individual should be resident of the first country
For example: Shreya (resident in India) moves to the USA for an exchange program as a teacher in a recognized college. The income she earns in the USA would be exempt from tax up to 2 years.
DTAA between India and USA – Tax Relief
DTAA Relief in India
If a resident in India earns an income that is taxed in the USA, the taxpayer can claim a deduction of an amount equal to income tax paid in the USA. However, such deduction should not exceed income tax in India on such foreign income. Thus, the resident earning foreign income can claim relief of the tax paid on foreign income.
DTAA Relief in USA
Resident in USA can claim credit against the USA tax for the amount of:
- Income tax paid to India by or on behalf of such resident
- Income tax received by the Indian Government from the Indian Company on dividend paid to USA Company that holds at least 10% of the voting stock of the Indian Company
DTAA between India and USA – Reporting in ITR
Non-Resident in India need to report and pay tax on any income earned outside India i.e. foreign income.
Resident in India earning a foreign income should report such income and foreign assets in the Income Tax Return.
Schedule FSI (Foreign Source of Income)
The taxpayer should add details of foreign income i.e. income earned outside India. Enter the following details:
- Country Code – Select the country in which income is earned
- Taxpayer Identification Number
- Income outside India – enter the amount of income earned outside India
- Taxes paid outside India – tax paid on income earned outside India
- Tax payable in India – tax payable in India on income earned outside India
- Tax Relief available = tax paid outside India or tax payable in India whichever is lower
- Relevant DTAA Article – enter details of the relevant article of DTAA under which the taxpayer claims the tax relief
Schedule TR (Tax Relief)
Once the taxpayer adds details of Foreign Income in Schedule FSI, the details in Schedule TR (Tax Relief) get populated. The double taxation relief is reduced from the tax calculation.
Schedule FA (Foreign Assets)
If the taxpayer holds any foreign assets outside India, they must report it under Schedule FA i.e. Foreign Assets.
To claim the foreign tax credit, the taxpayer should file Form 67 online on the income tax website before filing the Income Tax Return. Form 67 comprises details of foreign income and tax relief on such income.
You should first determine your residential status as per the Income Tax Act. If you hold the status of a Non-Resident, income earned outside India is not taxable in India. However, if you are a resident in the financial year, you must report such foreign income in the ITR in India. As per the DTAA agreement between India and the USA, the same income is not taxable in both countries. Thus, if you have paid tax on such income in USA, you can claim the credit of such tax paid by filing Form 67. Tax relief is lower of tax paid in USA or tax payable in India and can be reduced from total tax liability in India.