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DTAA between India and USA

For Non-Resident Indians (NRIs), income earned outside India is not taxable in India. However, for residents who earn income outside India, this income is taxable in India and must be reported in their Income Tax Return (ITR). Often, the foreign country where the income is earned also imposes taxes on that income, leading to the same income being taxed twice. To prevent this double taxation, taxpayers can benefit from the Double Taxation Avoidance Agreement (DTAA).

A DTAA is an agreement between two countries aimed at avoiding the double taxation of income. Here, we will discuss the DTAA between India and the USA and how it helps in avoiding double taxation.

Example

Avoiding Double Taxation: Understanding DTAA for Rahul

Rahul, a resident of India, works in the USA and pays Federal Income Tax to the US government. As a resident of India, Rahul’s income earned in the USA is also taxable in India. This situation can lead to double taxation, where the same income is taxed in both countries. To prevent this, India and the USA have entered into a Double Taxation Avoidance Agreement (DTAA).

Applicability of DTAA between India and the USA

The Double Taxation Avoidance Agreement (DTAA) between India and the USA applies to various entities such as individuals, trusts, partnership firms, companies, or any other entities having income in both countries. The agreement aims to prevent the same income from being taxed twice and covers the following taxes:

1. Federal Income Tax:
   • Imposed by the Internal Revenue Code in the USA.
2. Income Tax in India:
   • Including surcharge and surtax.

Residential Status

For individuals earning income in both India and the USA, understanding their residential status in each country is crucial. Let’s delve into the implications of the Double Taxation Avoidance Agreement (DTAA) between India and the USA, particularly concerning various types of income and tax relief provisions.

Determining Residential Status

• Permanent Home and Economic Relations: If a taxpayer has a permanent home in both countries, their residential status is determined by where their personal and economic relations are closer.
• Habitual Abode: In the absence of a permanent home, the country in which the individual has a habitual abode determines their residential status.
• Nationality and Competent Authority Decision: If the taxpayer is a national of both countries or neither, the competent authorities of both countries mutually decide their residential status.

Taxation of Various Incomes

1. Income from Immovable Property: Taxed in the country where the property is located.
2. Dividend Income: Taxed in the country where the recipient resides, subject to specified limits.
3. Interest Income: Taxed in the recipient’s country of residence, subject to specified limits.
4. Income of Professors, Teachers, and Research Scholars: Exempt from tax if specific conditions are met.

DTAA Relief Provisions

• Relief in India: Residents earning income taxable in the USA can claim a deduction equal to the income tax paid in the USA, not exceeding the tax liability in India on such foreign income.
• Relief in the USA: Residents in the USA can claim credit against US tax for income tax paid in India or on Indian dividends, subject to conditions.

Reporting in Indian Income Tax Return (ITR)

• Non-Residents: Must report and pay tax on foreign income.
• Residents: Should report foreign income and assets in their ITR.
  • Schedule FSI: Details of foreign income, taxes paid, and relief claimed under the DTAA.
  • Schedule TR: Reflects the tax relief claimed, reducing double taxation.
  • Schedule FA: For reporting foreign assets.
• Form 67: Essential for claiming foreign tax credit, filed online before the ITR.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/