India to USA Withholding Tax Rates Under DTAA
When an Indian entity makes payments to a US resident — whether dividends, interest, royalties, or fees for included services — withholding tax must be deducted at source, at the rates in force, under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961). The India-USA DTAA, signed on 12 September 1989, provides reduced rates on most of these payment types compared to India's domestic rates. Crucially, under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961), taxpayers can apply whichever rate is more beneficial — the treaty rate or the domestic rate — meaning the effective rate is always the lower of the two.
The United States has not signed the OECD Multilateral Instrument (MLI), so the India-USA treaty remains unmodified by MLI provisions. All rates below are based on the original 1989 treaty text, which has never been amended by a protocol. For the full treaty analysis, see our India-USA DTAA complete guide.
Dividend Withholding Rates
Under Article 10 of the India-USA DTAA, dividends paid by an Indian company to a US resident are subject to the following withholding rates:
| Category | DTAA Rate | Domestic Rate | Effective Rate | Conditions |
|---|---|---|---|---|
| Substantial holding (10%+ voting stock) | 15% | 20% | 15% | Beneficial owner is a company holding at least 10% of the voting stock of the dividend-paying company |
| General (less than 10% holding) | 25% | 20% | 20% | All other cases; domestic rate of 20% is more beneficial and applies under section 159(4) |
Key points: Since India abolished the Dividend Distribution Tax (DDT) from 1 April 2020, dividends are now taxable in the hands of the recipient. For US shareholders holding less than 10% of voting stock, the treaty rate of 25% is actually higher than the domestic rate of 20%, so the domestic rate applies. This makes the India-USA DTAA less favorable for portfolio investors compared to many of India's other tax treaties. The dividend withholding rate should be applied on the gross amount of dividends without deduction of expenses. For the fuller picture beyond rate tables -- including PE protections and treaty benefits for US companies in India -- see our dedicated guide.
US parent companies with substantial shareholdings (10%+) benefit from the reduced 15% treaty rate, saving 5 percentage points compared to the domestic rate.
Interest Withholding Rates
Article 11 of the treaty provides tiered interest rates depending on the nature of the recipient:
| Category | DTAA Rate | Domestic Rate | Effective Rate | Article Reference |
|---|---|---|---|---|
| Government and public sector | 0% | 20% | 0% | Article 11(3) |
| Banks and financial institutions | 10% | 20% | 10% | Article 11(2)(a) |
| General interest | 15% | 20% | 15% | Article 11(2)(b) |
The interest provisions offer substantial savings for US lenders. A US bank lending to an Indian company pays only 10% withholding tax instead of the domestic 20%, translating to significant cost savings on external commercial borrowings. Interest derived and beneficially owned by the two Governments, the Reserve Bank of India or the Federal Reserve Banks is exempt under Article 11(3)(a), as is interest on loans extended or endorsed by the Export-Import Banks (Article 11(3)(b)) and on transactions approved by the source-State Government (Article 11(3)(c)).
Interest arising in India paid to a US resident is deemed to arise in India if the payer is the Government of India, a political subdivision, a local authority, or an Indian resident. Where interest is paid in connection with a permanent establishment in India, it is deemed to arise in India regardless of the payer's residence.
Royalty and FTS Withholding Rates
Article 12 of the India-USA DTAA covers both royalties and fees for included services (FIS), which is the US treaty equivalent of fees for technical services (FTS) found in other Indian treaties:
| Category | DTAA Rate | Domestic Rate | Effective Rate | Conditions |
|---|---|---|---|---|
| Intellectual property royalties (copyright, patents, trademarks, designs, secret formulas, know-how) | 15% | 20% | 15% | Payments for the royalties defined in Article 12(3)(a) — copyrights of literary, artistic or scientific works including films, and any patent, trademark, design or model, plan, secret formula or process, or information concerning industrial, commercial or scientific experience (Article 12(2)(a)) |
| Equipment royalties (industrial, commercial or scientific equipment) | 10% | 20% | 10% | Payments for the use of, or right to use, industrial, commercial or scientific equipment as defined in Article 12(3)(b) (Article 12(2)(b)) |
| Fees for included services (make available, and services ancillary to an IP royalty) | 15% | 20% | 15% | Technical or consultancy services that make available technical knowledge to the recipient, or that are ancillary and subsidiary to the enjoyment of an Article 12(3)(a) right (Article 12(2)(a)) |
| FIS ancillary to an equipment royalty | 10% | 20% | 10% | Services ancillary and subsidiary to the enjoyment of the equipment for which an Article 12(3)(b) royalty is paid (Article 12(2)(b)) |
The "make available" clause is the defining feature of the India-USA treaty's treatment of service fees. Unlike most other Indian DTAAs that tax all fees for technical services, the India-USA treaty only taxes service fees if the services "make available" technical knowledge, experience, or skill that enables the recipient to independently apply that knowledge in the future. Indian courts and tribunals have consistently interpreted this requirement narrowly:
- Routine management or advisory services are generally NOT "included services"
- Market research, data processing, and general consultancy typically do not meet the threshold
- Services that transfer a blueprint, design methodology, or proprietary process DO qualify
- Training that equips the recipient to independently replicate the service qualifies
This makes the India-USA treaty particularly favorable for US service providers, as many routine cross-border service payments may fall outside the scope of FIS taxation entirely, with tax liability arising only if a PE is constituted in India.
Capital Gains Treatment
Article 13 of the India-USA DTAA does not provide a specific reduced rate for capital gains. It is a single undivided provision: except as provided in Article 8 (Shipping and Air Transport), each contracting state may tax capital gains in accordance with its domestic law. Unlike most of India's other treaties, it has no separate paragraphs allocating immovable-property, business-property or share gains, so the Indian domestic-law position governs:
Immovable property: Gains from the alienation of immovable property situated in India are taxable in India at domestic rates — 12.5% for long-term capital gains (held over 24 months) and applicable slab rates for short-term gains.
Shares and securities: Gains from the sale of shares in an Indian company by a US resident are taxable in India per domestic law. However, under US domestic law, non-resident aliens are generally not subject to US capital gains tax on sales of US securities, provided they are not present in the US for 183 or more days.
Ships, aircraft and containers: The only treaty carve-out is Article 8(6) — gains from the alienation of ships, aircraft or containers owned and operated by an enterprise whose operating income is taxable only in its state of residence are taxable only in that state.
US residents disposing of Indian assets should claim a foreign tax credit in the US under the treaty's credit method to avoid double taxation on capital gains.
How to Apply Reduced Rates
To apply the reduced DTAA rates instead of domestic rates, both the US recipient and the Indian payer must follow specific procedures:
For the US Recipient
- Obtain IRS Form 6166 — This is the Tax Residency Certificate (TRC) issued by the IRS certifying US tax residency for the relevant year
- Complete Form 41 (formerly Form 10F) — Furnish Form 41 to the Indian payer with prescribed details (name, status, nationality, tax identification number, period of residential status)
- Self-declaration — Provide a declaration confirming beneficial ownership of the income and absence of a PE in India (if applicable)
For the Indian Payer
- Verify documentation — Ensure TRC, Form 41, and self-declaration are on file before applying reduced rates
- File Form 145 (formerly Form 15CA) online — Submit Form 145 on the Income Tax portal before making the remittance
- Obtain Form 146 (formerly Form 15CB) — For payments exceeding INR 5 lakh, obtain a Chartered Accountant's certificate in Form 146
- Apply for lower withholding certificate — Under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961), the payee can apply to the Assessing Officer for a certificate authorizing lower or nil withholding; a payer uncertain about the correct rate applies under section 395(2) of the Income-tax Act, 2025 (section 195(2) of the Income-tax Act, 1961) instead
Beacon Filing's tax advisory team handles the complete documentation process for claiming DTAA benefits on cross-border payments to the USA.
Domestic Rates vs Treaty Rates Comparison
India's domestic withholding tax rates for non-residents (without surcharge and cess) are as follows, compared against the India-USA DTAA rates:
| Income Type | Domestic Rate (section 393(2)) | DTAA Rate | Savings |
|---|---|---|---|
| Dividends (10%+ holding) | 20% | 15% | 5% |
| Dividends (below 10%) | 20% | 25% (domestic applies) | 0% |
| Interest (general) | 20% | 15% | 5% |
| Interest (banks/FIs) | 20% | 10% | 10% |
| Interest (Government) | 20% | 0% | 20% |
| IP royalties (copyright, patents, trademarks, know-how) | 20% | 15% | 5% |
| Equipment royalties | 20% | 10% | 10% |
| Fees for included services | 20% | 15% | 5% |
Important note on surcharge and cess: Under domestic law, the withholding rate is further increased by applicable surcharge (rates vary by income level) and health and education cess of 4%, leading to effective rates of approximately 20.8% to 21.84%. When treaty rates are applied, surcharge and cess are not levied on top of the treaty rate, making the effective savings even greater than the headline comparison suggests.
Common Mistakes and Compliance Tips
Based on our experience handling India-USA cross-border payments, here are the most common errors and best practices:
Mistake 1: Not Obtaining TRC Before Remittance
Many payers apply treaty rates without collecting the Tax Residency Certificate first. The Income Tax Department can disallow the treaty benefit and demand tax at domestic rates plus interest if the TRC is not on record at the time of payment.
Mistake 2: Applying Treaty Rates to Non-Qualifying FIS
Not all service payments to the US attract the 15% FIS rate. If the service does not "make available" technical knowledge, the payment may not be taxable as FIS at all (no withholding required beyond business profit analysis). Conversely, mischaracterizing a qualifying FIS as a non-qualifying service can lead to short deduction notices.
Mistake 3: Ignoring the Beneficial Rate Rule
For dividends paid to US shareholders with less than 10% holding, the treaty rate of 25% is higher than the domestic rate of 20%. Payers must apply the more beneficial rate (20%) under section 159(4), not the treaty rate.
Mistake 4: Forgetting Forms 145 and 146 Requirements
Failing to file Forms 145 and 146 before remittance can result in a penalty under section 462 of the Income-tax Act, 2025 (section 271-I of the Income-tax Act, 1961), up to INR 1 lakh. The form must be filed electronically before the bank processes the outward remittance.
Mistake 5: Not Claiming Foreign Tax Credit in the US
US residents who have had Indian tax withheld must claim the foreign tax credit on their US return (Form 1116 for individuals, Form 1118 for corporations) within the applicable limitation period to avoid actual double taxation.
For end-to-end compliance support on cross-border payments between India and the USA, contact Beacon Filing's team of chartered accountants and tax advisors.
Frequently Asked Questions
What is the withholding tax rate on dividends paid from India to the USA?
For US shareholders holding 10% or more of the voting stock, the DTAA rate is 15%. For shareholders with less than 10% holding, the treaty rate of 25% is higher than the domestic rate of 20%, so the domestic rate applies under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961). The effective rate is therefore 15% for substantial shareholders and 20% for portfolio investors.
Is withholding tax applicable on software license payments to US companies?
This depends on the nature of the payment. Payments for the use of copyrighted software (as opposed to transfer of copyright) have been a subject of extensive litigation in India. The Supreme Court in Engineering Analysis Centre of Excellence held that payments for shrink-wrapped or off-the-shelf software are not royalties. Custom software development may qualify as FIS if it makes available technical knowledge.
How do US banks benefit from the India-USA DTAA?
US banks and financial institutions lending to Indian companies benefit from a reduced withholding rate of 10% on interest (compared to 20% domestic rate). This 10-percentage-point saving significantly reduces the cost of external commercial borrowings from US banks.
Can I apply for a nil withholding certificate under the India-USA DTAA?
Yes. Under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961), the payee can apply to the Assessing Officer for a certificate authorizing lower or nil withholding if the actual tax liability is expected to be nil or lower than the standard withholding rate. A payer who is uncertain about the correct rate applies under section 395(2) of the Income-tax Act, 2025 (section 195(2) of the Income-tax Act, 1961) instead. This is commonly used for interest payments exempt under Article 11(3).
What happens if the Indian payer deducts tax at a higher rate than the DTAA rate?
The US recipient can file an income tax return in India claiming a refund of the excess tax deducted. Alternatively, the US resident can claim the full amount of Indian tax as a foreign tax credit in the US (subject to US foreign tax credit limitations).
Are management fees paid to a US parent company taxable under the India-USA DTAA?
Management fees are typically not taxable as fees for included services under Article 12 unless they make available technical knowledge to the Indian subsidiary. General management oversight, strategic advice, and administrative support do not usually meet the make available threshold. However, if the US parent has a PE in India, profits attributable to the PE are taxable under Article 7.
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; domestic rate of 20% is more beneficial and applies | 25% | 20% | Article 10(2)(b) |
| Substantial holding (10%+ voting stock) Beneficial owner is a company holding at least 10% of the voting stock of the paying company | 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 all interest payments not falling under other categories | 15% | 20% | Article 11(2)(b) |
| Banks and financial institutions Interest paid on a loan granted by a bank carrying on a bona fide banking business, or by a similar financial institution including an insurance company — the bank must be the lender receiving the interest | 10% | 20% | Article 11(2)(a) |
| Government and public sector Interest paid to the Government, political subdivisions, local authorities, or on Government-approved loans and export credits | 0% | 20% | Article 11(3) |
USA — Royalty Rates
DTAA Rate vs Domestic Rate
| Income Category | DTAA Rate | Domestic Rate | Article |
|---|---|---|---|
| Intellectual property royalties (copyright, patents, trademarks, designs, secret formulas, know-how) Payments for the use of, or right to use, any copyright of a literary, artistic or scientific work including cinematograph films and tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or information concerning industrial, commercial or scientific experience — the royalties defined in Article 12(3)(a) | 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 — the royalties defined in Article 12(3)(b). Patents, trademarks and know-how are NOT in this tier; they are Article 12(3)(a) royalties taxed at 15% | 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 (make available) Technical or consultancy services that make available technical knowledge, experience, skill, know-how, or processes to the recipient enabling independent application, or ancillary and subsidiary to the enjoyment of an Article 12(3)(a) right | 15% | 20% | Article 12(2)(a) |
| Fees for included services (ancillary to an equipment royalty) Services ancillary and subsidiary to the enjoyment of the industrial, commercial or scientific equipment for which an Article 12(3)(b) royalty is paid. Services ancillary to an Article 12(3)(a) right fall in the 15% tier | 10% | 20% | Article 12(2)(b) |