Quick answer: The India-USA DTAA, signed 12 September 1989 and in force from 18 December 1990 (effective 1 January 1991 for US withholding taxes and 1 April 1991 in India), is based on a hybrid of the OECD and UN models and taxes dividends at 25% for holdings under 10% (15% for 10%-plus voting-stock holders), interest at 15% generally (10% for banks/financial institutions, 0% for government-approved loans), royalties at 15% for copyrights, patents, trademarks, and know-how (10% only for industrial, commercial, or scientific equipment royalties), and fees for included services at 15% (10% if ancillary to an equipment royalty). Because the US has not signed the MLI, the treaty remains unmodified by measures like the Principal Purpose Test.
Key takeaways:
- Signed 12 September 1989; effective 1 January 1991 for US withholding, 1 April 1991 in India.
- Dividends: 25% under 10% holding, 15% for 10%+ voting-stock holders.
- Interest: 15% general, 10% for banks/financial institutions, 0% government loans.
- Royalties: 15% for copyrights, patents, trademarks, and know-how; 10% only for equipment royalties.
- US has not signed the MLI — no Principal Purpose Test applies here.
Overview of the India-USA DTAA
The Double Taxation Avoidance Agreement (DTAA) between India and the United States is one of the most significant bilateral tax treaties for cross-border business and investment. Originally signed on 12 September 1989 in New Delhi, the treaty entered into force on 18 December 1990 and became effective for withholding taxes from 1 January 1991 in the US and from 1 April 1991 in India. The agreement is based on a hybrid of the OECD and UN Model Tax Conventions, reflecting the unique economic relationship between the world's largest and fifth-largest economies.
The primary objective of the India-USA DTAA is to eliminate or reduce double taxation on income earned by residents of one country in the other, promote cross-border trade and investment, and provide a predictable tax framework for businesses and individuals operating across both jurisdictions. The treaty covers various income types including business profits, dividends, interest, royalties, fees for included services, capital gains, and independent personal services.
For businesses setting up operations in India from the US, understanding this treaty is essential to structuring investments tax-efficiently. Beacon Filing's tax advisory services can help you navigate the treaty provisions and maximize available benefits.
Treaty History and Current Status
The India-USA tax convention was negotiated during the late 1980s as both countries sought to deepen economic ties. The Convention and a related Protocol were signed together at New Delhi on 12 September 1989. The treaty entered into force on 18 December 1990, with US-side provisions effective from 1 January 1991 and India-side provisions applying to income arising in taxable years beginning on or after 1 April 1991.
Notably, the United States has not signed the OECD Multilateral Instrument (MLI), which means the India-USA DTAA remains unmodified by MLI provisions such as the Principal Purpose Test (PPT) or modified permanent establishment rules. This distinguishes the India-USA treaty from many of India's other DTAAs (such as the India-UK DTAA) where MLI modifications now apply.
Key Treaty Articles
The India-USA DTAA contains 31 articles covering the full range of cross-border income categories. Below are the provisions most relevant to businesses and investors:
Article 5 — Permanent Establishment
Article 5 defines when a US enterprise creates a permanent establishment (PE) in India, which would subject its business profits to Indian taxation. The definition includes a fixed place of business such as a place of management, branch, office, factory, workshop, or warehouse. The treaty also includes a services PE provision: furnishing services for more than 90 days in any 12-month period creates a PE, and services furnished to a related enterprise (Article 9) can create a PE with no day threshold at all. Construction projects trigger PE status after 120 days.
Article 7 — Business Profits
Business profits of a US enterprise are taxable in India only if the enterprise carries on business through a PE situated in India. Profits are attributable to the PE only to the extent they relate to the PE's activities.
Article 10 — Dividends
Dividends paid by an Indian company to a US resident are subject to withholding at the source. The treaty provides for a 15% rate where the beneficial owner holds at least 10% of the voting stock, and 25% in other cases. Indian domestic law currently taxes dividends paid to non-residents at 20%, so the treaty rate provides relief for substantial shareholders.
Article 11 — Interest
Interest income is taxable at source at a maximum of 15% for general interest and 10% when paid to banks or financial institutions. Interest paid to governments or on government-approved loans is fully exempt. This represents significant savings against India's domestic rate of 20%, withheld under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), which applies the rates in force.
Article 12 — Royalties and Fees for Included Services
This article covers both royalties and fees for included services (FIS). Royalties for copyrights (including films), patents, trademarks, designs, secret formulas, and know-how are taxed at 15%, while royalties for the use of industrial, commercial, or scientific equipment are taxed at 10%. FIS are taxed at 15% for services that "make available" technical knowledge to the recipient, and 10% for services ancillary to an equipment royalty arrangement. The "make available" clause — found in only a handful of India's treaties, such as those with the USA, UK, and Singapore — has been extensively litigated, with Indian tribunals generally interpreting it narrowly — meaning routine services that do not transfer usable technical knowledge are not taxable as FIS.
Article 13 — Capital Gains
Each contracting state may tax capital gains in accordance with its domestic law. In practice, this means India taxes gains from immovable property situated in India and from shares of Indian companies under its domestic law — including, under section 9(2)(d) read with section 9(10)(a) of the Income-tax Act, 2025 (section 9(1)(i) of the Income-tax Act, 1961), shares of foreign entities deriving their value substantially from Indian assets. Under US domestic law, non-resident aliens generally do not pay US capital gains tax on stock sales, provided they are not present in the US for 183 or more days during the tax year.
Withholding Tax Rates Summary
The following table compares the treaty rates with India's domestic withholding tax rates for payments to US residents:
| Income Type | DTAA Rate | Domestic Rate | Treaty Article |
|---|---|---|---|
| Dividends (10%+ holding) | 15% | 20% | Article 10(2)(a) |
| Dividends (below 10%) | 25% | 20% | Article 10(2)(b) |
| Interest (general) | 15% | 20% | Article 11(2) |
| Interest (banks/FIs) | 10% | 20% | Article 11(2) |
| IP royalties (copyright, patent, trademark, know-how) | 15% | 20% | Article 12(2)(a) |
| Equipment royalties | 10% | 20% | Article 12(2)(b) |
| Fees for included services | 15% | 20% | Article 12(2)(a) |
Note: Under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961), where the domestic rate is lower than the treaty rate (as with general dividends at 20% vs treaty 25%), the taxpayer can apply the more beneficial domestic rate. For a detailed rate-by-rate breakdown, see our dedicated withholding tax rates page for India to USA.
Permanent Establishment Rules
The PE provisions in the India-USA DTAA are particularly detailed and relevant for US companies operating in India. Article 5 establishes several categories of PE:
Fixed Place PE: A place of management, branch, office, factory, workshop, mine, oil or gas well, quarry, warehouse (for storage facilities), farm, store used as a sales outlet, or installation for natural resource exploration (if used for more than 120 days).
Construction PE: A building site or construction, installation, or assembly project constitutes a PE if it lasts for more than 120 days in any 12-month period. This threshold is relatively short compared to many other Indian DTAAs.
Services PE: The furnishing of services, including consultancy services, creates a PE if such activities continue for more than 90 days within any 12-month period — or, with no day threshold, where the services are performed for a related enterprise under Article 9. This is a critical provision for US service companies operating in India, especially those serving their own group entities.
Agency PE: A person acting on behalf of a US enterprise who habitually exercises authority to conclude contracts in the enterprise's name creates a PE. However, independent agents acting in the ordinary course of their business do not constitute a PE.
US companies should carefully monitor the duration and nature of their activities in India to avoid triggering an unintended PE. Beacon Filing's India entry strategy services include PE risk assessments for US companies.
Tax Residency and Certificate Requirements
To claim treaty benefits, a person must be a tax resident of one of the contracting states. Under Article 4, residence is determined by each country's domestic law — in India, the 182-day presence test under the Income Tax Act, and in the US, the substantial presence test or green card test.
For individuals who are resident in both states, the tie-breaker rule applies sequentially: permanent home, center of vital interests, habitual abode, and nationality. If the tie cannot be broken, the competent authorities resolve the matter by mutual agreement.
To claim reduced treaty rates in India, a US resident must provide a Tax Residency Certificate (TRC) issued by the IRS. In the US, the equivalent documentation is Form W-8BEN (for individuals) or Form W-8BEN-E (for entities). Indian payers must also comply with Forms 145 and 146 (formerly Forms 15CA and 15CB) requirements when making remittances to US residents.
Mutual Agreement Procedure
Article 27 of the treaty provides for a Mutual Agreement Procedure (MAP) where a resident of either country believes that the actions of one or both contracting states result in taxation not in accordance with the treaty. The resident may present the case to the competent authority of the state of which they are a resident within three years from the first notification of the action giving rise to taxation.
The competent authorities shall endeavor to resolve the case by mutual agreement and may communicate directly with each other to reach agreement. This procedure is complemented by India's domestic provisions under the international tax dispute resolution framework. The MAP process is particularly relevant for transfer pricing disputes between India and the USA, which account for a significant portion of MAP cases filed with India's competent authority.
How to Claim Treaty Benefits
Claiming benefits under the India-USA DTAA requires compliance with both procedural and substantive requirements:
Step 1: Obtain a Tax Residency Certificate (TRC)
The US resident must obtain a TRC from the IRS (Form 6166) certifying their US tax residency for the relevant fiscal year. This is the foundational document for claiming treaty benefits in India.
Step 2: Provide Form 41 (formerly Form 10F)
The non-resident must furnish Form 41 to the Indian payer, containing prescribed information such as name, status, nationality, TIN, and the period of residential status. This form can be filed electronically on the Indian Income Tax portal.
Step 3: Self-Declaration
A self-declaration confirming that the recipient does not have a permanent establishment in India (if claiming that income is not attributable to a PE) and that the recipient is the beneficial owner of the income.
Step 4: Indian Payer Compliance under Section 393(2)
The Indian payer must deduct tax at the treaty rate (or domestic rate, whichever is more beneficial) and file Form 145 electronically before making the remittance. For payments exceeding INR 5 lakh, a Chartered Accountant's certificate in Form 146 is also required. The payer must also file quarterly TDS returns reflecting the lower treaty rate applied.
Step 5: Claim Relief under Section 159(1)/(2)
Indian residents earning income in the US can claim double taxation relief under section 159(1) of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961) by way of a foreign tax credit for US taxes paid, subject to the provisions of Rule 128.
Beacon Filing's FEMA and RBI compliance services ensure all documentation is properly prepared for claiming treaty benefits. For a deeper look at how these provisions play out in practice, see our guide to DTAA benefits for US companies operating in India, covering dividend, interest, and royalty savings alongside PE protections.
Frequently Asked Questions
What is the India-USA DTAA and when was it signed?
The India-USA DTAA is a bilateral tax treaty signed on 12 September 1989 between the Government of India and the Government of the United States. It entered into force on 18 December 1990, effective from 1 January 1991 for US taxes and from 1 April 1991 in India. The treaty aims to eliminate double taxation on cross-border income and prevent fiscal evasion.
Does the MLI apply to the India-USA DTAA?
No. The United States has not signed the OECD Multilateral Instrument (MLI), so the India-USA DTAA is not modified by MLI provisions such as the Principal Purpose Test (PPT) or the MLI's modified PE rules.
What is the "make available" clause in the India-USA DTAA?
Under Article 12, the India-USA treaty taxes "fees for included services" subject to a restrictive "make available" clause (a feature shared with only a handful of India's treaties, such as the UK and Singapore DTAAs). Fees for included services are taxable only if the services "make available" technical knowledge, experience, skill, know-how, or processes to the recipient, enabling them to apply the knowledge independently. Routine services like management consulting, market research, or outsourced data processing that do not transfer technical know-how are generally not covered.
How does a US company avoid creating a permanent establishment in India?
A US company can avoid PE exposure by keeping service assignments in India under 90 days in any 12-month period (noting that services furnished to a related enterprise can create a PE regardless of duration), not maintaining a fixed place of business in India, not having dependent agents who habitually conclude contracts on its behalf, and ensuring construction projects do not exceed 120 days. Using independent contractors and limiting the duration of service provision are common strategies.
Can a taxpayer choose between the DTAA rate and domestic rate?
Yes. Under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961), a taxpayer can apply whichever rate — the DTAA rate or the domestic rate — is more beneficial. For instance, if the domestic withholding rate on dividends is 20% but the DTAA rate for small shareholders is 25%, the taxpayer can opt for the lower 20% domestic rate.
What documentation is required to claim DTAA benefits in India?
The US resident must provide a Tax Residency Certificate (IRS Form 6166), Form 41, and a self-declaration of beneficial ownership and non-PE status. The Indian payer must file Form 145 (and Form 146 for payments exceeding INR 5 lakh) before making the remittance.
How are capital gains from Indian shares taxed for US residents?
Under Article 13, each country may tax capital gains per its domestic law. India taxes capital gains on Indian shares at applicable domestic rates (12.5% for long-term gains; short-term gains at 20% for listed shares under section 196 of the Income-tax Act, 2025 (section 111A of the Income-tax Act, 1961), slab rates for unlisted shares). The US resident can claim a foreign tax credit in the US for taxes paid in India, thereby avoiding double taxation.
This article is for general information only and is not legal, tax, or investment advice. Confirm current rules with the relevant authority or a qualified professional — or ask our team. See our full disclaimer.
Doing business between India and USA? Our team handles the treaty filings.
Tax Advisory for Foreign Investors in IndiaUSA — Dividend Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| General (less than 10% holding) Beneficial owner holds less than 10% of voting stock of the paying company | 25% | 20% | Article 10(2)(b) |
| Substantial holding (10%+ voting stock) Beneficial owner is a company holding at least 10% of the voting stock | 15% | 20% | Article 10(2)(a) |
USA — Interest Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| General Standard rate for interest payments between residents of both countries | 15% | 20% | Article 11(2) |
| Banks and financial institutions Interest paid to a bank or financial institution (including insurance companies) | 10% | 20% | Article 11(2) |
| Government and approved loans Interest paid to either Government, political subdivisions, or on Government-approved loans | 0% | 20% | Article 11(3) |
USA — Royalty Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| IP royalties (copyright, patent, trademark, know-how) Payments for the use of or right to use copyrights (including films), patents, trademarks, designs, models, plans, secret formulas or processes, and know-how | 15% | 20% | Article 12(2)(a) |
| Equipment royalties (industrial, commercial, or scientific equipment) Payments for the use of or right to use industrial, commercial, or scientific equipment (other than Article 8 ships, aircraft, or containers) | 10% | 20% | Article 12(2)(b) |
USA — FTS Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| Fees for included services Technical or consultancy services that make available technical knowledge, experience, skill, know-how, or processes to the recipient | 15% | 20% | Article 12(2)(a) |
| Fees for included services (ancillary to equipment royalty) Services ancillary and subsidiary to the enjoyment of property for which an equipment royalty under Article 12(2)(b) is paid | 10% | 20% | Article 12(2)(b) |