Withholding Tax Rates: India to USA Under DTAA

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 under 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 90(2), 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 treaty text and the 2000 protocol amendment. 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:

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.

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:

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 paid between governments or on approved export credit arrangements is fully exempt.

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:

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. Instead, each contracting state may tax capital gains in accordance with its domestic law. The key provisions are:

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.

Business assets: Gains from the alienation of movable property forming part of the business property of a PE are taxable in the state where the PE is located.

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

1. Obtain IRS Form 6166 — This is the Tax Residency Certificate (TRC) issued by the IRS certifying US tax residency for the relevant year
2. Complete Form 10F — Furnish Form 10F to the Indian payer with prescribed details (name, status, nationality, tax identification number, period of residential status)
3. Self-declaration — Provide a declaration confirming beneficial ownership of the income and absence of a PE in India (if applicable)

For the Indian Payer

1. Verify documentation — Ensure TRC, Form 10F, and self-declaration are on file before applying reduced rates
2. File Form 15CA online — Submit Form 15CA on the Income Tax portal before making the remittance
3. Obtain Form 15CB — For payments exceeding INR 5 lakh, obtain a Chartered Accountant's certificate in Form 15CB
4. Apply for lower withholding certificate — Under Section 197, the payer or payee can apply to the Assessing Officer for a certificate authorizing lower or nil withholding

BeaconFiling'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:

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 90(2), not the treaty rate.

Mistake 4: Forgetting Form 15CA/15CB Requirements

Failing to file Form 15CA/15CB before remittance can result in penalties under Section 271-I (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) 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 BeaconFiling'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 90(2). 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 197 of the Income Tax Act, the payee (or payer) 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. 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.