The India-US Tax Treaty: How NRIs Can Leverage Tax Advantages in Both Nations

The USA is home to 1.28 million NRIs and 3.18 million PIOs. The majority of them receive passive income from business endeavors in India, dividends on investments, and interest on bank deposits and accounts. Additionally, when the total income hits 2.5 lakhs (the tax-free amount), you have to file a tax return. Are there different income tax laws, rates, and exemptions for Indian residents compared to non-resident Indians? In general, the answer is yes. In addition, visit Tripbeam to grab affordable last minute flight deals to India from USA.

The Income Tax Act of India applies to all Indian citizens, whether they are residents or not, however, the amount and type of taxation depends largely on their residency status. First off, non-resident Indians (NRIs) are solely liable for taxation on income derived from sources within India. They are not required to declare or pay taxes on their foreign assets or earnings.

Second, in situations when both countries have legal jurisdiction to tax specific types of income, the India-US tax treaty shields nonresident individuals (NRIs) against double taxation. You must understand when to take advantage of the US-India tax treaty to lower your tax burden as an NRI who works and resides in the United States. This is your guide to the main points of the US-India tax agreement and NRI taxation in India.

Establishing your Tax Residency Status for the Year

The first step in understanding the complexities of the tax system is to ascertain your residence status for tax purposes. There are specific requirements in place in both India and the USA to determine a person’s tax residency status for a given year. Due to overlapping requirements, you may be deemed a tax resident of both India and the USA in the same tax year, making you liable to taxes in both nations. This is where the tax treaty between the US and India, which has provisions like tax credits, exemptions, deductions, and residence tie-breakers, comes in handy. But first, let’s be clear about the residency status.

Generally speaking, taxpayers in India are categorized according to how long they spend in the country within a fiscal year: ordinarily resident, not normally resident, and non-resident. If you spend 182 days in India during a financial year, you are deemed a tax resident of India under Section 6 of the Income Tax Act. If they visit India for no more than 181 days throughout their stay, PIOs and NRIs who work in the USA are still considered non-residents for tax purposes.

A tax resident of India is defined as an Indian citizen who earns more than INR 15 lakh rupees (from sources within India) and has been in the country for more than 120 days per year and 365 days per four years before the Finance Act, 2020, which amended Section 6. This pertains to those who, in any other country, are exempt from paying taxes.

NRI Taxation in India: Taxable income for NRIs

What is taxable income for non-residents? For non-resident Indians (NRIs), any income that is judged to have been created, received, and accrued in India is taxed. Along with income from “other sources,” which includes interest on bank accounts and savings as well as dividends on stocks, mutual funds, and other assets, it also covers wages, income from businesses, properties, and capital gains on assets in India. Interest is treated differently by the tax authorities based on whether it is received on a Foreign Currency Non-Resident (FCNR), Non-Resident Ordinary (NRO), or Non-Resident External (NRE) account. Furthermore, you can visit Tripbeam to buy the cheapest business class flights to India from USA.

How does the US-India Tax Treaty advantage Non-Resident taxpayers?

The US-India Tax Treaty, a multiple Taxation Avoidance Agreement (DTAA) between the two countries, establishes guidelines and safeguards against multiple taxation of the same income, thus creating a framework for cross-border taxes. It also provides certain advantages to non-resident taxpayers in India; the two principal ones are the avoidance of double taxation and the possibility of a lower tax rate for NRIs. Non-resident taxpayers may opt to use the lower of the treaty rate or the IT slab rates.

For instance, according to the income slab rates for NRIs, the tax imposed on income received from Indian sources increases to 39%. Such income has a 20% tax rate under the US-India tax treaty. Thanks to the treaty, NRIs are now eligible to get tax credits in the USA for taxes paid on income generated in India. If the tax is withheld at the source, NRIs can subtract their TDS from their total tax liability in India (TDS). To be qualified for the advantages of the US-India tax treaty, NRIs must, however, submit certain paperwork, such as a tax resident certificate (TRC), Form 10F, and a non-permanent establishment (PE) statement. Also, be sure to explore Tripbeam.ca to buy the cheapest flights from Canada to India.

Are there any drawbacks of the US-India Tax Treaty for NRI taxpayers?

The treaty that protects non-resident taxpayers from having to pay taxes on the same income twice—in India and the United States—is beneficial. While you can sometimes find that India’s tax rate on a certain type of income is lower than the tax rate that applies under the treaty, there aren’t any major disadvantages per se. For example, the US-India tax treaty specifies a 25% tax rate on dividend income from investments in Indian firms, yet the Income Tax Act taxes it at a rate of 20%. In this case, NRI taxpayers can choose local tax rates because it is more advantageous for them. Additionally, you can check out Tripbeam to book cheap international flights from USA to India.

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