The Treaty and the Foreign Tax Credit

"There is a treaty, so I will not be taxed twice" is true in a narrower way than it sounds. The India-US tax treaty and the US foreign tax credit are two separate tools. The treaty caps what India may take at source and sets out how each country gives relief. The credit is how the US lowers your US tax by the Indian tax you paid. Neither removes tax automatically, both have to be claimed, and neither reaches every kind of income. This chapter explains how they fit together for a US tax resident with income in India.

What the treaty is

The convention between the United States and India was signed in New Delhi on 12 September 1989. It covers federal income taxes in the US and the income tax and surtax in India (Article 2). It does not cover US state taxes, social security taxes or estate and gift taxes. Parts that matter to an NRI:

• Interest (Article 11). India may tax interest paid to a US resident, but at no more than 15% of the gross amount in the general case, and no more than 10% where the interest is paid on a loan granted by a bank carrying on a bona fide banking business. Interest on a deposit in an Indian bank, which you receive and the bank pays, falls in the general case.
• Dividends (Article 10). The cap is 25% for an individual shareholder, and 15% for a company holding at least 10% of the voting stock.
• Capital gains (Article 13). Each country may tax gains under its own law. The treaty sets no cap here, so an Indian tax on a gain on property or shares is whatever Indian law says, and the US credit is what relieves it.
• Residence tie-breaker (Article 4), covered in chapter 1.
• Relief from double taxation (Article 25). The US allows a credit for income tax paid to India, within the limits of US law, and India gives a deduction from its tax for the income tax paid in the US on income that may be taxed there, up to the Indian tax on that income. Article 25 also provides that income the US can tax only because the person is a US citizen is not treated as arising in the US for this purpose.

The saving clause

Article 1(3) says that, subject to listed exceptions, each country may tax its residents, and the US may tax its citizens, as if the treaty had never come into effect. For a US resident that means the treaty will not lower the US tax on, say, Indian interest or dividends. The listed exceptions in Article 1(4) include the relief in Article 25, non-discrimination, the mutual agreement procedure and two paragraphs of Article 20, those on social security and public pensions (paragraph 2) and child support (paragraph 6). Private pensions are not among them. In practice the treaty's value to a US resident is its cap on what India can withhold, its tie-breaker, and the credit mechanism, not a cut in US tax.

How the foreign tax credit works

IRS Publication 514 explains that a foreign tax qualifies if it is imposed on you, you paid or accrued it, it is your legal and actual liability, and it is an income tax or a tax in place of one. The credit is limited (the visa-shelf chapter Rent, Interest and Gains from Home, and the Foreign Tax Credit goes through an example): roughly, your US tax multiplied by your foreign taxable income, divided by your total taxable income. Passive income, such as interest and most dividends, is limited separately from general income. A credit that exceeds the limit can be carried back one year or forward ten. You may take a deduction for foreign taxes instead of a credit, but the credit is worth more in nearly every case. Form 1116 is the usual form. You convert tax paid into dollars at the exchange rate on the date you paid it, or at the average rate for the year on an accrual basis, and since India's tax year runs April to March and yours runs January to December, the tax for one Indian year can touch two US returns.

Two limits surprise people. First, the credit offsets income tax only. The 3.8% net investment income tax is not an income tax the ordinary credit rules reach (Treasury Regulation 1.1411-1(e)). On 31 August 2026 the Federal Circuit held, in cases under the Canada and France treaties, that a treaty credit does not offset it, as reported by tax advisers; the India treaty's Article 25 likewise works subject to the limits of US law. A high earner should plan to owe the tax in full on Indian investment income. Second, only the right amount of foreign tax counts, which brings us to the case most NRIs meet.

The case most NRIs meet: NRO interest

Take NRO interest. India's bank deducts tax at source. Without a treaty claim the deduction is typically 31.2%, the 30% rate for a non-resident's other income plus 4% cess (chapter 2). With a treaty claim, supported by a US residency certificate and the information India requires, the rate can be limited to 15%; ask the bank what it deducts in total, because we have not confirmed whether banks add cess to the treaty rate.

Publication 514 says that where a treaty country requires you to pay the full tax and claim the refund, the qualified foreign tax is the amount figured at the lower treaty rate, not the amount actually paid, because the excess is refundable. So:

1. The Indian tax up to the treaty rate counts toward the US credit.
2. Indian tax above it does not. It is recovered, if at all, by filing an Indian return and claiming the refund.
3. The credit is also capped by the US tax on the same income, so it cannot take your US tax below what you owe on your other income.

For a single filer with $160,000 of income, the top bracket reached is 24.0%, and for one with $55,000 it is 12.0%. Read that against the Indian figures:

In the first row, the US bracket is above the treaty rate. The credit covers the treaty-rate portion of the Indian tax and the US collects the difference. In the second row, the US bracket is below the treaty rate, so the credit is limited by the US tax on the interest. Part of the creditable Indian tax then exceeds what the credit can absorb this year; it can be carried back one year or forward ten, and the Indian tax above the treaty rate is, again, something to reclaim in India. These are approximations: the real limit is the Form 1116 fraction and depends on all your income, so use the NRE, NRO and FCNR after-US-tax calculator for your own figures.

What neither tool covers

• Tax-free Indian income is not credited. NRE interest and FCNR(B) interest pay no Indian tax, so there is no Indian tax to credit and the US tax is paid in full.
• State taxes. The treaty covers federal income tax only. Whether your state gives any credit for Indian tax is a question for your state's rules and your preparer.
• Gains on property. India's tax on a sale is whatever Indian law sets, and the US credit relieves it; the details for a house are in the second book of this shelf and in the plan for selling property in India.
• US citizens and green card holders who move to India. They remain US taxpayers on worldwide income while India also taxes them as a resident. The credit and Article 25 then do the work in both directions, and the order of the claims matters. Take advice before the move.