The US–India tax treaty is 30 pages of sentences like “notwithstanding the provisions of paragraph 2.” It governs whether you’re taxed once or twice on your salary, your dividends, your 401(k), and the money you send home. Here’s the translation — what it actually does for an Indian professional living in America, and where it quietly doesn’t help.
The 60-second version
The treaty (in force since 1991) does three things that matter to you: (1) it decides which country taxes what when both claim you; (2) it caps the tax the “source” country can charge on cross-border dividends, interest and royalties; and (3) it guarantees a foreign tax credit so the same income isn’t taxed twice. What it does not do: it doesn’t exempt you from filing in either country, it doesn’t recognise Roth accounts, and it doesn’t protect you from India’s taxation of your US retirement withdrawals once you’re resident there. The treaty usually means you pay the higher of the two countries’ rates — not zero, and not both.
First: which country counts you as a resident?
Everything flows from this. The US says you’re a tax resident if you hold a green card or pass the substantial presence test (roughly, 183 days counted over a weighted three-year window — most H-1B holders qualify from their first full year). India counts you as resident if you spend 182+ days there in a financial year (with tighter rules for high-income Indian citizens). In a move year you can be resident of both; the treaty’s tie-breaker then assigns you to one country using, in order: permanent home → centre of vital interests (family, economic ties) → habitual abode → nationality. This matters because your treaty-resident country gets the first claim on most of your income.
A special case worth knowing: F-1 and J-1 students/scholars are “exempt individuals” for up to five calendar years — they file as non-residents and can claim the treaty’s student-article benefits (Article 21), including a US standard deduction that most other non-residents don’t get. Once you switch to H-1B, that ends.
Income by income: who taxes what
| Income | Treaty rule (plain English) | What it means for you in practice |
|---|---|---|
| US salary (while living in the US) | Taxed where the work is performed — the US. | India doesn’t tax it while you’re a non-resident of India. Keep US payslips; in your move year, apportion by days. |
| US dividends paid to an India resident | US withholding capped at 25% (treaty rate). | Once you move back and file a W-8BEN with your broker, US brokers withhold 25% on dividends; India taxes too but credits the US tax. |
| US interest paid to an India resident | Capped at 15%; bank deposit interest is often exempt under US domestic law. | Usually little or no US tax on savings-account interest after you leave; India taxes it at slab. |
| US capital gains on stocks | Not covered by a cap — each country applies its own law. | US doesn’t tax non-residents’ stock gains (after you’ve left); India taxes residents’ worldwide gains at its rates. While in the US, it’s the reverse. |
| 401(k) / IRA withdrawals (pensions) | Private pensions are taxable in your residence country; the US also keeps the right to tax US-source pensions. | Living in India: both may tax; you claim a credit for US tax in India → you pay the higher rate once. Timing around RNOR years (below) is the lever. |
| US Social Security | Taxable only by the paying country (the US). | India shouldn’t tax it; the US taxes non-residents on 85% of it at 30%, unless reduced — confirm current practice. |
| Indian income while you live in the US (FD interest, rent, dividends) | India taxes at source (often via TDS); the US taxes worldwide income with a credit. | Report it on your US return (Form 1116 for the credit). NRE interest is India-exempt but fully taxable in the US — a common miss. |
| Indian mutual funds | No relief — and the US treats them as PFICs. | Punitive US tax and Form 8621. See our investing guide. |
The credit mechanism: why you pay the higher rate, once
Suppose you’re resident in India and draw $20,000 from a US IRA. The US taxes it first (say effective 12% as a non-resident in a low-income year: $2,400). India taxes it at your slab (say 30%: $6,000) but credits the $2,400 → you pay India $3,600. Total: $6,000, i.e. the higher rate. If the US rate were higher than India’s, you’d pay the US rate and India would collect nothing extra — but India won’t refund the excess. Hence the rule of thumb: the treaty saves you from double tax, not from the higher tax.
The three windows that change everything
- Departure year (dual-status US return). The year you leave, you may file as a US resident for part of the year and non-resident for the rest. Income after departure from non-US sources escapes US tax; US-source income doesn’t. Leaving early in the calendar year shrinks your US-resident income — often making that a cheap year for 401(k) moves.
- RNOR years in India (usually 2–3). As a “Resident but Not Ordinarily Resident,” India generally doesn’t tax your foreign-source income. US retirement withdrawals, US dividends and US capital gains taken during RNOR are taxed only by the US — frequently at low non-resident rates. This is the single most valuable planning window for returnees. (Run the numbers.)
- The year you become fully resident in India. Worldwide income is taxable from here. Anything you meant to realise cheaply should be done before this — and your US accounts now need W-8BEN on file so brokers withhold at treaty rates, not the default 30%.
Common myths, quickly
- “The treaty means I don’t have to file in one country.” No. Filing obligations come from each country’s domestic law. Treaties change what you owe, not whether you file.
- “I’ll claim the treaty to pay zero tax somewhere.” Almost never. It allocates and credits; it rarely exempts (students and Social Security are the notable exceptions).
- “My Roth is tax-free under the treaty.” The treaty is silent on Roth; India taxes the growth. See our Roth guide.
- “NRE interest is tax-free.” In India, yes. In the US, while you’re a US resident, it’s ordinary income — and the account counts for FBAR.
- “Treaty benefits apply automatically.” Often you must claim them: Form 8833 on the US side for certain positions, W-8BEN with US payers after you leave, and Form 67 in India to claim foreign tax credit.
Forms you’ll meet
- W-8BEN — given to US brokers/banks after you become a non-resident so they withhold at treaty rates.
- Form 1116 — claim the foreign tax credit on your US return for Indian tax paid (while a US resident).
- Form 67 — claim credit in India for US tax paid (once an Indian resident). Must be filed on time.
- Form 8833 — disclose treaty-based positions on a US return (e.g. tie-breaker residency).
- FBAR / Form 8938 — report foreign accounts while you’re a US resident. Not treaty forms, but they travel with this topic.
Treaty rules and their interpretation shift, and your facts (visa, green card years, days, family ties) change which article applies. Use this guide to walk into a cross-border CPA’s office knowing what to ask — not to skip the visit.
Related: 401(k) on a visa · Roth IRA if you move back · Investing on a visa (PFIC, FBAR) · The Leaving America Checklist.
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