India-US DTAA (Protecting Indian Investors from double tax)

The investor saves $3,000 by claiming credit for U.S. tax already paid, keeping the total tax at one effective rate instead of paying twice.

Note: Paasa helps investors apply these treaty benefits correctly through guided Form 67 filing and compliant tax reporting, ensuring every dollar earned abroad is taxed only once.

What is the India & U.S. DTAA Treaty?

The India–U.S. Double Taxation Avoidance Agreement (DTAA) has been in force since 1991. It is a tax treaty that ensures the same income is not taxed twice, once in the country where it is earned (the source country) and again in the country where the investor lives (the residence country).

• For Indian investors earning in the U.S. through RSUs, dividends, interest, or global ETFs, this treaty is what keeps your total tax fair and compliant.
• It applies to individuals, companies, and trusts that are tax residents of either India or the United States and covers most types of cross-border income, including:
  • Employment income (including RSUs and stock options)
  • Dividends and interest from U.S. investments
  • Royalties or technical service fees
  • Capital gains on financial assets

In simple terms, the DTAA works through two mechanisms:

1. Allocating taxing rights: It defines which country has the primary right to tax each category of income.
2. Granting relief: If both countries tax the same income, the country of residence allows a tax credit for taxes already paid abroad.

You can read the official India–U.S. DTAA text on the Government of India’s website here.

For a practical investing workflow for this market, read Invest in US from India.

Residency rules under DTAA

The treaty’s first step is to decide where you are a tax resident. If you are considered a resident in both India and the U.S. during a financial year.

For example, if you work remotely for a U.S. company while living in India, the tie-breaker rule decides which country will treat you as its resident for tax purposes.

It follows a clear sequence:

• Permanent home: Where you have a fixed home available.
• Centre of vital interests: Where your personal and economic relations are stronger.
• Habitual abode: Where you stay more frequently.
• Nationality: If still unresolved, the country of citizenship applies.
• Mutual agreement: In rare cases, both tax authorities mutually decide.

Understanding residency is crucial because DTAA benefits apply only to residents of one of the treaty countries. For most Indian investors earning U.S. income (dividends, RSUs, or capital gains), India remains the country of residence and the U.S. is the source country.

Source vs Residence (Who gets to tax what)

The treaty divides taxation rights between the country of source (where income arises) and the country of residence (where you live and file taxes).

Here’s how it works for key income types relevant to global investors:

How DTAA Applies to Dividends, Interest & Capital Gains

When Indian investors earn income from U.S. assets such as stocks, ETFs, or bonds, the U.S. automatically deducts tax at source before paying out. This is known as withholding tax, and by default, it’s 30% for non-U.S. residents.

However, under the India–U.S. Double Taxation Avoidance Agreement (DTAA), this rate reduces once you declare your Indian tax residency through Form W-8BEN.

Let’s see how it works for the most relevant income types:

Dividends

• By default, the U.S. withholds 30 % tax on any dividends paid by U.S. companies.
• Once you submit Form W-8BEN (declaring you’re an Indian tax resident), this rate automatically drops to 25% under the DTAA.
• A further reduction to 15% applies only if you own 10% or more voting stock in that company (which rarely applies to retail investors).

Note: For most Paasa investors, the applicable rate is 25%. This deduction happens automatically in your brokerage account, and the same amount can be claimed as a foreign tax credit when filing Indian taxes.

Interest

• Interest income from U.S. bonds, Treasury bills, or fixed-income ETFs also faces a 30% default withholding.
• Under the DTAA, once Form W-8BEN is filed, this tax reduces to 15 % for individual investors

How to avoid double taxation?

Once both countries have exercised their taxing rights, the DTAA ensures you receive relief through the Foreign Tax Credit (FTC) system in India under Section 90 and 91 of the Income-tax Act.

Here’s how it works:

• If you paid 15% tax in the U.S. and your Indian slab rate is 30%, India allows a credit for the 15% already paid abroad.
• You only pay the remaining 15% balance in India, ensuring total tax equals your Indian rate, not both combined.

Note: Paasa simplifies this entire process for Indian investors in U.S. markets by generating global income summaries and ready-to-file tax reports that make claiming DTAA benefits effortless.

Example 1: RSU Income (when shares vest in India)

Imagine an Indian professional working at a U.S. tech company like Microsoft or Google. As part of their compensation, they receive Restricted Stock Units (RSUs) that vest over time.

• When those RSUs vest while the person is working from India, the U.S. company automatically withholds federal tax on the value of the shares — usually around 22 % for most employees and up to 37% for very high earners.
• Since the person is an Indian tax resident, India also taxes that same income as part of their global earnings.
• Under the India–U.S. DTAA, the individual can claim a Foreign Tax Credit (FTC) in India for the tax already withheld in the U.S.
• Effectively, they only pay any difference (if India’s rate is higher), not the full amount twice.

Example: Suppose an Indian professional at Microsoft India receives $200,000 worth of RSUs that vest this year while they are working from India.

Paasa's Role:

1. Paasa guides Indian investors through every step of cross-border compliance, from preparing Form 67 and supporting documentation to understanding how to claim foreign-tax credits correctly.
2. In addition, many RSUs from U.S. tech companies fall under U.S. state-tax exposure. Paasa helps investors diversify RSUs into global structures to reduce that state-tax drag and protect long-term value. You can learn more about this approach here: Diversify Your RSUs with Paasa.

Example 2: Dividend Income from U.S. Stocks and ETFs

An Indian investor using Paasa may hold individual U.S. stocks like Apple, Microsoft, or Nvidia, or U.S.-listed ETFs such as the S&P 500 ETF (SPY) or Nasdaq 100 ETF (QQQ).

• U.S. companies and ETFs pay regular dividends, and the U.S. automatically applies a 30 % withholding tax on those payments by default.
• Once the investor submits Form W-8BEN declaring Indian tax residency, the India–U.S. DTAA reduces this to 25 %.
• The investor receives the balance 75 % in the Paasa account.
• In India, the investor must still declare the gross dividend (before U.S. tax) as part of global income.

How DTAA helps

• The 25 % tax already withheld in the U.S. can be claimed as a Foreign Tax Credit (FTC) through Form 67 when filing in India.
• If the investor’s Indian slab rate is 30 %, they pay only the balance 5 % domestically.
• Effective taxation stays 30 %, not 55 %, and compliance remains straightforward.

Example: Let’s say an Indian investor using Paasa holds a mix of U.S. stocks and ETFs (for instance, Apple, Microsoft, and the S&P 500 ETF SPY) that generate $20,000 in annual dividends.

Paasa’s role:

Paasa guides investors through the filing and documentation steps, especially Form 67 and cross-border FTC claims, so that global income stays accurately reported and DTAA benefits are applied automatically.

U.S. Estate Tax (What the DTAA does not cover)

Many Indian investors holding U.S. stocks, ETFs, or RSUs are unaware that U.S. estate tax is not covered under the India–U.S. DTAA and can apply to non-residents who own more than $60,000 in U.S.-situs assets such as shares or ETFs.

If something happens to the investor, their heirs could face an estate tax of up to 40% on the value of the U.S. portfolio.

Paasa helps investors mitigate this exposure by diversifying RSUs and U.S. holdings into UCITS ETFs and other globally domiciled structures that are not subject to U.S. estate tax, while staying FEMA-compliant.

You can read more here: 

1. How Paasa helps RSU holders diversify beyond U.S. estate tax
2. Why Indian investors should choose UCITS over US ETFs

Common Mistakes Investors Make

Even seasoned investors often make simple mistakes when it comes to managing cross-border income. These usually don’t arise from intent, just from lack of clarity. Here are the most common ones to avoid:

Assuming U.S. withholding is automatically adjusted in India
The U.S. tax withheld on your dividends or RSUs doesn’t automatically sync with Indian filings. You must claim it through Form 67 to get the credit.

Skipping Form 67 submission
Missing this step means losing eligibility for the Foreign Tax Credit (FTC) - even if you’ve already paid tax in the U.S.

Not reporting foreign assets in Schedule FA
Every overseas investment, brokerage account, or RSU holding must be disclosed in your Indian tax return. Non-disclosure can trigger scrutiny later.

Confusing estate tax with double taxation
The U.S. estate tax applies on death to foreign investors owning over $60,000 in U.S.-listed assets. It’s different from income-based double taxation. Paasa helps investors mitigate this by diversifying into UCITS ETFs and other non-U.S. structures.

Forgetting treaty rates on dividends and interest
Without filing Form W-8BEN, the default U.S. withholding is 30%. Under the India–U.S. DTAA, that drops to 25% for dividends and 15% (or 10% for institutions) for interest. Filing correctly preserves post-tax returns.

Conclusion

The India–U.S. DTAA ensures that Indian residents earning from U.S. sources pay tax only once on their global income. Understanding and applying it correctly helps investors stay compliant and protect post-tax returns.

About Paasa

Paasa is an Indian investor’s gateway to compliant global investing, trusted by HNIs, family offices, and professionals with global income. It enables seamless diversification into markets across the U.S., Europe, China, Japan, and beyond.

What makes Paasa unique is its India-facing compliance layer built for cross-border investors:

• FEMA, LRS, and DTAA alignment embedded into every global transaction.
• Integrated tax analytics and reporting for Indian residents investing overseas (covering LTCG, STCG, dividend tax, and TCS tracking).
• End-to-end support for remittance structuring, reconciliation, and tax-credit documentation such as Form 67.

Whether it’s U.S. equities, global ETFs, UCITS funds, or managed strategies, Paasa provides a single transparent platform that ensures your global investments stay compliant with India’s tax and regulatory framework.

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