India and the United States of America signed a Double tax avoidance agreement (DTAA). It was signed to enable taxpayers (NRI’s) to get relief from paying multiple taxes. DTAA does not mean that the resident is free from paying taxes; it is just that the resident can avoid paying higher taxes in both countries. In addition, it allows them to cut down tax implications on incomes earned by them, which both countries could tax in the absence of DTAA. It also reduces the chances of tax evasion. For example, Mr X, a resident of India, works in the United States. In turn, Mr X is given some remuneration in the United States for the work done. Now, the US government levies the federal income tax on the income earned in the US. Since Mr X is a resident of India, the Indian government may charge income tax on the same amount, i.e. the remuneration earned abroad. The governments of both countries have entered into an agreement known as the double tax avoidance agreement to protect innocent taxpayers from the harmful effects of double taxation.
It will provide relief in the following manner:
Either by exempting income earned from abroad in its entirety.
Or by giving credit to the extent of tax already paid abroad.
Tax implications under different cases There are many scenarios in which there will be tax implications, including income from immovable property, Dividends, Interest, Capital gains & Payments received by professors, teachers, and research scholars. These are explained below:
Income from immovable property
Income derived from immovable property is to be taxed in the country in which it is situated. Following is considered as income from the immovable property:
Income from agriculture or forestry
Income derived from the direct use, letting etc.
Income from immovable property of an enterprise
Dividend As per relevant provisions of DTAA, a resident company may pay a dividend to a resident of another country if the dividend income is taxable in the country in which the dividend income is received. So, for example, India’s reward would be taxable if a US company paid it to an Indian shareholder. The dividend can be taxed in the country where it is paid. When a taxpayer resides in a receiving country, the tax on dividends cannot exceed the following:
15% of the gross amount – Dividend recipients must be shareholders of at least 10% of the company awarding the dividend
In any other case, 25% of the gross amount
Interest Under the relevant provisions of DTAA, if the interest income is derived from a country and paid to a resident of other countries, it is taxable in the country where the recipient is a resident. So, for example, if a US resident earned interest on their income in India, it is taxable in the US. Otherwise, there will be tax consequences. Although interest can also be taxed in the country from which it arises, the dividend tax cannot exceed the following amount if the taxpayer is a country’s resident:
Banks or financial institutions must pay 10% interest on their loans.
For all other loans – 15%.
Capital gains In this case, the capital gains are subject to tax based on the country’s domestic laws. For example, If a US Resident, say, Miss Q, sells their Indian property in the market, then the property is liable to be taxed as per the Indian domestic laws.
Payment received by professors, teachers and research scholars If Miss K moves to the US to serve as a teacher or research scholar in any school or university, Miss K will be exempted from tax on the fulfilment of the following condition:
Engagement should not be for a period exceeding two years.
Before the visit to the US, she must be a resident of the earlier country
At Itseki Mercurius India, we assist our clients in dealing with various income tax compliances, including income tax assessments, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about tax implications under India & US tax treaty, kindly contact us.